Joint Bond

A joint bond (also called a joint-and-several bond) is a debt security guaranteed by two or more parties. If the primary issuer defaults, bondholders can seek repayment from any or all guarantors. Shared liability reduces investor risk but typically results in a lower yield.

Key takeaways

• A joint bond is guaranteed by at least two parties, creating joint-and-several liability.
• It works like a loan co-signer: secondary guarantors promise payment if the issuer fails.
• Common when a parent company backs a subsidiary’s borrowing or when multiple institutions pool credit.
• Safer than single-issuer bonds, so returns are generally more modest.
• Joint bonds have been proposed at the sovereign level (e.g., eurozone common bonds) to spread risk.

How joint bonds work

When a smaller or lower-rated entity issues debt, guarantors with stronger credit—often a parent company or partner institutions—agree to guarantee payment of principal and interest. This assurance makes the bond more attractive to investors and can lower borrowing costs for the issuer.

Joint-and-several liability means each guarantor is individually responsible for the full obligation, not just a share. In default, bondholders may pursue repayment from the strongest guarantor(s), increasing recovery prospects.

Example: Federal Home Loan Bank system

The Federal Home Loan Bank (FHLB) System issues joint bonds through its Office of Finance. These securities back borrowing for the 11 regional Federal Home Loan Banks, which in turn fund local lenders supporting mortgages, small businesses, and agriculture. The joint-and-several structure strengthens the credit profile of the overall issuance.

Example: Eurozone proposals and lessons from Greece

Economists have suggested joint sovereign bonds for the euro area—sometimes called common or safe bonds—to provide weaker members with access to lower-cost credit and to create a supply of safe government debt. The Greek crisis highlighted limits of national-only debt within a shared currency: some argued eurozone-wide backing could have eased financing strains. Proposals for such bonds face political hurdles, with critics warning they could encourage fiscal moral hazard among weaker governments.

Pros and cons

Pros
* Lower default risk for investors due to multiple guarantors.
* Lower borrowing costs for weaker issuers when backed by stronger parties.
* Can create high-quality debt instruments that support broader financial stability.

Cons
* Lower yields compared with unsecured or single-issuer bonds.
* Guarantors assume contingent liabilities that can strain their balance sheets.
* At a sovereign level, shared guarantees can create moral-hazard concerns.

What investors should check

• Identity and creditworthiness of all guarantors.
• Whether liability is truly joint-and-several or pro rata.
• Specific covenants and enforcement rights in case of default.
• Yield relative to credit risk and alternative securities.

Conclusion
Joint bonds reduce investor exposure by spreading repayment obligation across multiple parties. They are useful when a weaker issuer needs stronger backing, but the trade-offs include lower returns and potential contingent liabilities for guarantors.