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.
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.
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.
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.
Stocks may greatly increase or decrease in value depending on how the market does, but interest rates that come with bonds stay put. Although the lenders are unable to get astoundingly big returns if a business does well, they are still protecting themselves from the danger of a business going bankrupt. Nevertheless, they still acquire the interest rate that was agreed upon by both parties.
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.
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.
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.
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.
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.
Stocks may greatly increase or decrease in value depending on how the market does, but interest rates that come with bonds stay put. Although the lenders are unable to get astoundingly big returns if a business does well, they are still protecting themselves from the danger of a business going bankrupt. Nevertheless, they still acquire the interest rate that was agreed upon by both parties.
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.
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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