Financial terms can intimidate anyone who has not yet accustomed themselves to the various concepts involved with finance. Rather than waiting until the last minute when you will need them, it is critical to associate yourself with these terms while you still can. Surety bonds, for one thing, include some of the more familiar terms involving 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.
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.
One thing it could do is to borrow the money by issuing bonds. Since these are fluid entities, many people can purchase bonds. The company could offer bonds worth ten thousand dollars at face value and if at least one hundred people purchase a bond by lending this amount, then the company would have enough money to buy the factory it needed for expanding.
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.
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.
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.
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.
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.
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.
One thing it could do is to borrow the money by issuing bonds. Since these are fluid entities, many people can purchase bonds. The company could offer bonds worth ten thousand dollars at face value and if at least one hundred people purchase a bond by lending this amount, then the company would have enough money to buy the factory it needed for expanding.
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.
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.
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.
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.
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.
No comments:
Post a Comment