Why are financial guarantees important for revenue bonds?

Financial guarantees play a crucial role in the context of revenue bonds because they provide protection for bondholders against potential losses resulting from defaults. When a financial guarantee is in place, it assures investors that even if the revenue-generating entity fails to meet its obligations, the guarantor will step in to cover the bond payments. This added layer of security is particularly significant for revenue bonds, which are backed solely by the cash flow generated from specific projects or revenues rather than general taxation.

These guarantees can significantly bolster investor confidence, making it more attractive for them to invest in revenue bonds, thus potentially lowering the interest rates that issuers must pay to attract buyers. While enhancing investor interest and potentially improving bond ratings are positive outcomes, the fundamental reason financial guarantees are vital is their protective function for bondholders, ensuring they receive the expected returns even in adverse situations.