Two months ago, relatively few Americans could define the term, "debt ceiling." Today, most of us know exactly what it is and how it effects us. That's the hidden upside of the current economic downturn, it's slowly turning average Americans into economic experts. One part of the financial world that is still a mystery to most of us is the world of bonds. These financial instruments are the backbone of large scale economics and are used for everything from protecting businesses against fraud to funding large commercial projects. In many ways, they act as a sort of insurance policy for businesses providing security on their investment. If you're one of those people who is interested in learning about the world of bonds, here are some terms you should know.
Bond Auction - An auction where financial institutions bid on debt instruments or bonds for their portfolios. The winning bidder holds the bond and receives interest until the project or financial obligation is completed.
Fidelity Bond - This type of bond is used by businesses as a sort of insurance on the actions of specific employees. For example, a tech firm may take out a fidelity bond on an engineer who is working on a high stakes project.
Indemnity Bond - These bonds are used by financial institutions to cover their potential losses on a loan. On a large commercial real estate project, an indemnity bond may be issued by the bank to provide security against losses if the developer goes bankrupt before the building is finished.
Surety Bond - A surety bond is a three party arrangement that guarantees a financial obligation is met. The bond is given to the Obligee from the principal (who is responsible for paying) and the surety who issues it.
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Few people know much about surety and fidelity bonds. But that is unfortunate, because these security bonds can be incredibly useful, and they're certainly worth learning a little about.
A surety bond is a promise, or contract, made by an obligee party and a principle party. The principal generally promises, or is liable, to pay the obligee, if he or she breaks their contract or obligation. Surety bonds, in this way, protect obligees from sustaining major monetary losses. They also cut down on potential court costs, because the terms of the contract and claim are easily understood. And the parties involved would have no reason to settle the dispute or liability in court.
A fidelity bond, similarly, is a type of insurance protection, offered by a commercial insurance company. As a form of insurance protection, it covers policy holders for any losses they may incur due to the fraudulent acts of others. Most often, fidelity bonds are taken out by business owners to protect them from losses incurred by employees. This bond, or insurance policy, protects the security of the company from fraudulent employees interested in
Both of these bonds are a type of bid bond. Bid bonds guarantee that a contractor will enter a contract if offered a winning bid. Both of these bonds are also a type of indemnity. Indemnity guarantees that one party must pay a second party for losses or damages suffered due to some sort of catastrophe or negligence caused by the first party.
These bonds are easy to manage, and can be renewed or replaced at any time. They also involve little risk.