What is Bank Guarantee?
A bank guarantee is a contract between a bank and a customer that provides financial security for the customer in case of non-performance or non-payment of a transaction. A bank provides the guarantee on behalf of its customer, referred to as the “guarantor.” The contract is a form of credit issued by a bank or financial institution.
A bank guarantee is used when the customer needs assurance that the obligations associated with a transaction will be met. For example, when a company is awarded a contract, the customer may require a guarantee from the bank that the company will fulfill its contractual obligations. In such a case, the bank will issue a confirmation to the customer, which means the bank will pay the customer if the company fails to fulfill its obligations.
The bank guarantee outlines the terms and conditions of the contract, including the guarantee amount, the duration of the warranty, and the process for making a claim. The bank may also require the customer to provide additional security, such as collateral, to secure the guarantee. In addition to assuring the customer, a bank guarantee can also be used to protect the bank.
A bank guarantee can be an effective risk management tool for businesses, assuring that the customer’s obligations will be met.
What are Bonds?
Bonds are fixed-income investments used by individuals to achieve long-term financial goals. They are issued by governments and corporations and are used to finance large projects, such as infrastructure or capital improvements.
Bonds are loan agreements between the issuer and the investor that specify a fixed rate of return over a set period. The investor lends money to the issuer and receives interest payments throughout the bond‘s life. When the bond attains maturity, the issuer repays the principal amount to the investor.
Bonds offer lower risk than stocks but a lower potential for return because the issuer must pay the principal and interest payments regardless of whether the bond performs well or poorly. bonds have a fixed maturity date and are not subject to the same fluctuations in price as stocks.
Bonds can be purchased through brokers, mutual funds, and other investments. They can also be purchased directly from the issuer, which carries additional risk as the investor is exposed to the issuer’s creditworthiness.
Bonds can be used for various investment goals, such as income, diversification, and capital preservation. For example, investors may use bonds to generate revenue or diversify their portfolios to reduce risk. Bondholders may also seek capital preservation by investing in bonds with lower risk and higher yields.
Difference Between Bank Guarantee and Bonds
- Bank guarantees are more liquid than bonds.
- Bank guarantees are subject to more stringent regulatory requirements than bonds.
- Bank guarantees are not redeemable, while bonds are redeemable at the end of the term.
- Bank guarantees are not subject to taxes, while bonds are subject to taxes.
- Bank guarantees are not backed by collateral, while bonds are approved by collateral.
Comparison Between Bank Guarantee and Bonds
| Parameters of Comparison | Bank Guarantee | Bonds |
| Issuance | A bank issues a bank guarantee. | A company gives a bond. |
| Credit Risk | A bank guarantee is associated with the credit risk of the bank. | A bond carries the credit risk of the issuing company. |
| Credit Facility | It is a form of credit facility. | A bond is a form of debt. |
| Interest Rate | Bank guarantees do not pay interest. | Bonds pay interest at a predetermined rate. |
| Maturity | Bank guarantees have no predetermined maturity date. | Bonds have a predetermined maturity date. |