8:18 AM
Unknown
Financial terms may seem quite daunting to those who have not yet acquainted themselves with the various concepts involving finance. Rather than just ignoring them until you find yourself associated in legal agreements with other parties, it is necessary to educate yourself on these terms as early as possible. Surety bonds, for example, are one of the more common terms that you come across in legal transactions.
Before understanding what a surety is, it is vital to first understand the concept of a bond. Bonds are legally binding agreements made between two or more entities. Stocks are a different concept entirely. More people normally consider bonds as a means of investing money to be less risky than stocks.
For example, imagine an established corporation that has plans on expanding. Perhaps this corporation has to buy another factory to increase its production and that factory might be worth one million dollars. However, they do not have the one million dollars to purchase the factory.
For one, it could borrow loans by issuing bonds. Because these can be fluid entities, several people can acquire bonds. The company has an option of offering bonds with a face value of ten thousand dollars and if about one hundred people acquire a bond by loaning this amount, the company would already have enough to get the factory that it needed to expand.
Perhaps in exchange for their loan, lenders are promised with a ten percent interest annually. Regardless of how well or how poorly the business does, the company is liable to pay this interest before their own shareholders even get their profit. This is one of the ways it varies from stocks.
With stocks, whether the investors gain either massive profits or endure massive deficits, is largely dependent on the business performance. However, with bonds, lenders are protected from risks of bankruptcy, but the annual interest they receive stays at the agreed upon amount even if the company does extremely well and its assets increase. Regardless of how the business performs, they will be paid that ten percent interest.
They also get a guarantee that they get the principal amount they contributed once the bond has reached its maturity or the date the company has promised that they get the entire principal value they initially paid, which in this case, is ten thousand dollars. Of course, bonds do not come without their own risks. Private corporations that issue them often come with a larger risk than government bodies issuing bonds because corporations carry with them the risk of going bankrupt.
This is the reason why private entities commonly offer generous interest rates as a means of attracting more lenders. However, if a private business declares bankruptcy, the lenders lose their money altogether. This is when sureties come in to play.
A surety is often referred to as a risk transfer mechanism. The lender could employ the use of a surety in the form of an insurance company. A surety, in this case, is a financial guarantee to the lender that if the company fails to meet its obligations or pay its dues, the lenders can still get the principal amount they initially paid. The financial guarantee will be offered by the insurance company on behalf of the corporation that promised to return the loans to its lenders. A surety bond is more commonly used in licensing agreements, but this is just to explain the general idea behind them. Educating yourself financially may seem like such a hassle, but you will be wiser for it in the future in terms of handling your hard earned money.
Before understanding what a surety is, it is vital to first understand the concept of a bond. Bonds are legally binding agreements made between two or more entities. Stocks are a different concept entirely. More people normally consider bonds as a means of investing money to be less risky than stocks.
For example, imagine an established corporation that has plans on expanding. Perhaps this corporation has to buy another factory to increase its production and that factory might be worth one million dollars. However, they do not have the one million dollars to purchase the factory.
For one, it could borrow loans by issuing bonds. Because these can be fluid entities, several people can acquire bonds. The company has an option of offering bonds with a face value of ten thousand dollars and if about one hundred people acquire a bond by loaning this amount, the company would already have enough to get the factory that it needed to expand.
Perhaps in exchange for their loan, lenders are promised with a ten percent interest annually. Regardless of how well or how poorly the business does, the company is liable to pay this interest before their own shareholders even get their profit. This is one of the ways it varies from stocks.
With stocks, whether the investors gain either massive profits or endure massive deficits, is largely dependent on the business performance. However, with bonds, lenders are protected from risks of bankruptcy, but the annual interest they receive stays at the agreed upon amount even if the company does extremely well and its assets increase. Regardless of how the business performs, they will be paid that ten percent interest.
They also get a guarantee that they get the principal amount they contributed once the bond has reached its maturity or the date the company has promised that they get the entire principal value they initially paid, which in this case, is ten thousand dollars. Of course, bonds do not come without their own risks. Private corporations that issue them often come with a larger risk than government bodies issuing bonds because corporations carry with them the risk of going bankrupt.
This is the reason why private entities commonly offer generous interest rates as a means of attracting more lenders. However, if a private business declares bankruptcy, the lenders lose their money altogether. This is when sureties come in to play.
A surety is often referred to as a risk transfer mechanism. The lender could employ the use of a surety in the form of an insurance company. A surety, in this case, is a financial guarantee to the lender that if the company fails to meet its obligations or pay its dues, the lenders can still get the principal amount they initially paid. The financial guarantee will be offered by the insurance company on behalf of the corporation that promised to return the loans to its lenders. A surety bond is more commonly used in licensing agreements, but this is just to explain the general idea behind them. Educating yourself financially may seem like such a hassle, but you will be wiser for it in the future in terms of handling your hard earned money.
About the Author:
To be able to obtain more information about surety bonds you must go directly to our insurance-related website. Find here the link to click on http://www.ifbinsurance.com/bond-product today.
0 comments :
Post a Comment