Difference between Bank Guarantee and Bond

Bank Guarantee

A bank guarantee is defined as a guarantee provided by a lending institution under which the bank will assume the overall costs in case a borrower defaults on their liabilities or obligations. A bank guarantee is seen as a provision placed in the bank loan prior to them agreeing to provide the money. The bank will also charge a fee for providing the guarantee. It also encourages companies and consumers to make purchases they would otherwise not make, which helps to increase the business activity along with consumption and also provides entrepreneurial opportunities.

Commercial banks often help to provide bank guarantees to individuals or business owners who want to borrow money for purchasing new equipment. For example, with the help of a guarantee, the bank assumes liability for the debtor in case they fail to fulfil their contractual obligations. The bank offers to stand as a guarantor on behalf of business customers in a transaction. Most bank guarantees also charge a fee that is equal to a small percentage of the entire contract amount (The percentage is normally 0.5% to 1.5% of the total guaranteed amount).

There are different kinds of guarantees like bid bond guarantees, performance guarantees, advance or deferred payment guarantees and financial guarantees. The guarantees are also used for different reasons. They are often included in arrangements that take place between a small firm and a large organisation. The larger organisation may also seek protection against any counterparty risk, and it requires the smaller party to receive the bank guarantee in advance of their work.

Bond

Bonds are used by various governments and corporations for raising money along with financing needed projects. A bond also resembles an IOU that takes place between a borrower (who issues the bond) and a lender (the bondholder). The entity also issues a bond at a par value with a stated coupon rate. An investor effectively lends a bond to the issuer at a certain time and receives coupon payments that are issued until the par value is repaid by the party that had borrowed the money.

A bond gets issued with maturity or end date. The maturity date is the date when the principal amount of the loan is due to be paid to the owner of the bond. It includes the terms and conditions of the bond along with the details of the amount for the fixed or variable interest payments that will be made by the borrower. The interest payment or the coupon rate is also a part of the total return that the bondholders can earn for loaning their funds to an issuer. The coupon rate is the interest that determines the total payment.

Bonds are described as fixed-income securities and are also one of three main asset classes. The other asset classes that are more familiar to investors are cash equivalents and stocks (equities). Many of the government and corporate bonds are publicly traded; several others are traded privately or over-the-counter (OTC) between the lender and borrower.

Difference between Bank Guarantee and Bond

There are many points of difference between bank guarantee and bond, which we should discuss below to get a better insight into this topic:

Bank Guarantee

Bond

Definition

A bank guarantee occurs when a lending institution stands as a guarantor and promises to cover any losses when the borrower fails to do so.

A bond is a deal or agreement between the borrower and lender that acts as a surety of the payment for either borrower or lender.

Issuers

A bank guarantee gets issued only by a bank as a surety for certain individuals.

Bonds get issued by the government, banks or even large companies to meet their capital requirements.

Payment Route

The payment for a bank guarantee will go from seller to buyer via the bank.

The bank does not have to pay the bondholder, and they can keep the fees if there are payment issues.

Accounting

A bank guarantee is seen as a liability for the bank because it is an obligation that the bank has to pay.

A bond is like an insurance product because of which it is considered an asset.

Users

Bank guarantees get used by individuals for international transactions to help the businesses grow.

Bonds are used by governments as well as corporations as they allow them to borrow huge sums of money.

Conclusion

Although there are several areas of differences between bank guarantee and bond, both are extremely important in the running of an economy. They help both the investors and the company get some sort of surety which is very crucial on any financial transaction.

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