Our brother-in-law Henry is a nice enough guy, but he’s absolutely horrible with money and has several failed business ventures under his belt. Normally, we don’t concern ourselves with his financial ineptitude—that’s our sister’s problem—but his newest business idea has led him straight to our company’s door. We manufacture heavy equipment, and he wants to buy a tower crane for his soon-to-be-formed real estate development company.
A good tower crane can cost about a million dollars to buy, which is why most construction and development businesses rent them instead. But Henry insists he has to buy one, and he wants us to sell it to him. Surprise, surprise, he doesn’t have the money for it up front, so he’ll need to take out a loan. We’re not sure about this, so we request a letter of guarantee from his financial institution.
A “letter of guarantee” is basically a letter from the bank promising that, even if Henry defaults on his tower crane loan payments, the bank will cover his debt. They might not cover all of it—for example, they might just guarantee the principal of the loan but not any interest it accrues—but it does offer us a little financial protection when (er...if) Henry’s big ideas don’t pan out.
Letters of guarantee can also be used in other areas of the financial investment world. If we write a call order for a thousand shares of stock, our bank can issue a letter of guarantee promising that (a) we actually own the stock we’re trying to sell, and (b) those shares will be delivered if the option is exercised.
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Finance: What is Pension Benefit Guarant...0 Views
Finance Allah shmoop What is the Pension Benefit Guaranty Corporation
Well the PBGC is a notionally independent agency of the
federal government Its goal is to protect the retirement incomes
of nearly forty million American workers in nearly twenty four
thousand private sector defined benefit engine plans And that mission
statement is right off their website The agency was set
up in nineteen seventy for is part of Arisa Employee
Retirement Income Security Act to protect defined benefit plans That
one were there Benefit is a huge deal because it's
non identical Twin sister is a defined contribution plan The
big diff well in a defined contribution pension plan employees
contribute some percentage of their income to their retirement pension
and the employer matches it and that's it The money
gets invested in the stock market and goes up and
down and up and down but over time mostly up
And then the employees retires Decades later owning whatever the
market or their investments that they risk say they young
period End of story But in a defined benefit plan
the employer essentially guarantees a minimum amount of invested return
That is the big boss Usually the federal government with
its union employees on taxpayer dollars then guarantees a raid
of say nine percent a year to the employee retiring
in the form of a minimum monthly draw from their
pension that the employees can take out If the market
goes through a really bad spell well then it's up
to the company to make up the difference to that
employees The people who framed a Risa knew of the
likely issue that the guaranteed investment return could end up
bankrupting states and or the country So PBGC was formed
and it helps a lot of people like one point
five million who ultimately rely on PBGC to bail out
their pensions And if you're one of those people while
you can expect to get something like sixty five thousand
dollars annually or about fifty three hundred bucks a month
assuming you retire at sixty five So if you retire
early well those cheques arriving in your mailbox won't be
quite so heavy Retire late in while the numbers go
up And maybe the best part is that the U
S taxpayer doesn't need to get all up in arms
Since the dough used to manage PBGC doesn't come from
John Q Taxpayer but rather from the private worlds employers
So in forty or fifty years PBGC may be your
best friend but until then well you're invisible Rabbit pal 00:02:30.543 --> [endTime] will be with you through thick and thin
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