In bonds, what does a reserve fund typically secure?

A reserve fund in the context of bonds usually serves the purpose of providing security for both principal and interest payments. This fund is established to ensure that there are dedicated resources available to meet these obligations, which can be critical in times of financial stress or uncertainty.

The rationale behind this is that having a reserve fund creates a safety net for investors, reassuring them that their returns will be protected even if the issuer experiences financial difficulties. Thus, when issues with cash flow arise, the reserve fund can be drawn upon to make sure that both principal repayments and interest payments continue as scheduled.

This concept is particularly important for municipal bonds and other forms of secured debt where the predictability of cash flows can be affected by economic conditions. The existence of such a reserve fund can enhance the creditworthiness of the bond, potentially leading to lower borrowing costs for the issuer and greater confidence for the investors.