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.
In order to understand the surety bond, let us comprehend what a bond is first. Bonds are agreements that legally bind two or more individuals or entities. Do not think of them as stocks because stocks are individual concepts of their own. Bonds are normally considered safer than stocks in terms of means to earn profit with your money.
To illustrate, imagine a well established corporation with plans on expanding. Maybe this corporation wants to buy a new factory to increase manufactures and that factory may be worth a million dollars. One concern is, they cannot provide a million dollars to obtain 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 are also guaranteed a full return of the principal amount that they contributed when the bond reaches its maturity date or the date that the company pledged they would be paid the full principal value that they initially loaned. In this case, the principal value amounts to ten thousand dollars. Obviously, bonds still have risks of their own. Government bodies that issue bonds are less risky compared to private corporations issuing bonds since private businesses can go bankrupt.
Because of this, private entities offer more generous interest rates so they can persuade more lenders. If all else fails and bankruptcy is declared, the lenders lose both the initial amount they loaned and the interest promised to them. To prevent these types of losses, sureties are employed.
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.
In order to understand the surety bond, let us comprehend what a bond is first. Bonds are agreements that legally bind two or more individuals or entities. Do not think of them as stocks because stocks are individual concepts of their own. Bonds are normally considered safer than stocks in terms of means to earn profit with your money.
To illustrate, imagine a well established corporation with plans on expanding. Maybe this corporation wants to buy a new factory to increase manufactures and that factory may be worth a million dollars. One concern is, they cannot provide a million dollars to obtain 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 are also guaranteed a full return of the principal amount that they contributed when the bond reaches its maturity date or the date that the company pledged they would be paid the full principal value that they initially loaned. In this case, the principal value amounts to ten thousand dollars. Obviously, bonds still have risks of their own. Government bodies that issue bonds are less risky compared to private corporations issuing bonds since private businesses can go bankrupt.
Because of this, private entities offer more generous interest rates so they can persuade more lenders. If all else fails and bankruptcy is declared, the lenders lose both the initial amount they loaned and the interest promised to them. To prevent these types of losses, sureties are employed.
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.
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