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 getting into the concept of surety, it is important to understand first what a bond is. A bond is a legally binding agreement made between at least two entities. Stocks are something else entirely. More often, people consider bonds to be the safer means of investing your money to gain profit.
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.
To get past this roadblock, it could acquire the money it needs by obtaining loans in the form of bonds. More than one person can purchase bonds because these are liquid entities. To issue bonds, the company could offer them with a face value or par value of at least ten thousand dollars. About one hundred people should acquire these bonds to allow the company to gain the exact amount it needs for the factory.
In exchange for the money they loaned, perhaps the company can promise lenders with an annual interest of ten percent. Regardless of how successfully or how badly the business does, they are still liable to pay lenders the interest even before the company shareholders obtain their profit. What is explained here is one way in which it differs from stocks.
Stocks can increase or severely decrease in value but interest rates in bonds do not. The lenders do not get as much of the reward if the business does well, but they also protect themselves from the risk of bankruptcy. Nevertheless, they get the interest rate agreed upon.
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 why private entities usually offer larger interest rates than government bodies in order to attract more lenders. If bankruptcy is declared, however, the lenders do not get the principal amount they paid plus the interest they were promised. This is when a surety comes in to play to prevent lenders from losing their money altogether.
In order to prevent great losses, sureties or commonly known as financial guarantees, are employed. The lenders could get a surety from an insurance company. This way, they have a financial guarantee that if a corporation that borrowed loans cannot meet its obligations, the lenders may still obtain the principal amount that they initially contributed. On account of the corporation which borrowed loans, the insurance company can return the principal amount to the lenders. There are various and more complex instances that require the guarantee of the surety bond. This is just a simpler way of explaining the general gist behind it. Soon, when you have to make hard decisions about your own money, educating yourself financially as early as now will greatly help you.
Before getting into the concept of surety, it is important to understand first what a bond is. A bond is a legally binding agreement made between at least two entities. Stocks are something else entirely. More often, people consider bonds to be the safer means of investing your money to gain profit.
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.
To get past this roadblock, it could acquire the money it needs by obtaining loans in the form of bonds. More than one person can purchase bonds because these are liquid entities. To issue bonds, the company could offer them with a face value or par value of at least ten thousand dollars. About one hundred people should acquire these bonds to allow the company to gain the exact amount it needs for the factory.
In exchange for the money they loaned, perhaps the company can promise lenders with an annual interest of ten percent. Regardless of how successfully or how badly the business does, they are still liable to pay lenders the interest even before the company shareholders obtain their profit. What is explained here is one way in which it differs from stocks.
Stocks can increase or severely decrease in value but interest rates in bonds do not. The lenders do not get as much of the reward if the business does well, but they also protect themselves from the risk of bankruptcy. Nevertheless, they get the interest rate agreed upon.
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 why private entities usually offer larger interest rates than government bodies in order to attract more lenders. If bankruptcy is declared, however, the lenders do not get the principal amount they paid plus the interest they were promised. This is when a surety comes in to play to prevent lenders from losing their money altogether.
In order to prevent great losses, sureties or commonly known as financial guarantees, are employed. The lenders could get a surety from an insurance company. This way, they have a financial guarantee that if a corporation that borrowed loans cannot meet its obligations, the lenders may still obtain the principal amount that they initially contributed. On account of the corporation which borrowed loans, the insurance company can return the principal amount to the lenders. There are various and more complex instances that require the guarantee of the surety bond. This is just a simpler way of explaining the general gist behind it. Soon, when you have to make hard decisions about your own money, educating yourself financially as early as now will greatly help you.
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