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 are Secured Bonds v Unsecu...53 Views
finance a la shmoop what are secured bonds versus unsecured bonds and
debentures okay so that's an insecure bond but we're talking about here is an [Insecure bond hiding under the sheets]
unsecured bond what is an unsecured bond well this is that was an unsecured bond
old school like 15 century old school it was just a handshake one guy promised to [People shake hands]
pay back another 400 pounds of barley in return for three sheep next year or
something like that and the sheep were the payment form not the guarantee and
the bond was loan emic bond ursins word in fact the promise to pay was secured
but by his word or commitment to repay the loans kind of old school debenture
unsecured bonds work similarly today corporations sell debentures to Wall [Corporations sending debentures to Wall St]
Street all the time debenture being a fancy word for an
unsecured bond it's just debt that the company promises [Definition of debenture]
to pay back well if they don't then oh well and yes the debenture holders could
in theory then take ownership of the equity of the company but in reality [Debenture holders take the majority of the company equity pie chart]
unsecured bonds when not paid back almost always mean the death of the CEOs
career and likely also of the careers of all the other members of the management [Gravestones for the management board]
team so while unsecured bonds are notionally more risky than secured bonds
well this issue hasn't been tested all that often in real life okay so if
that's an unsecured bond what's a secured bond well it's one that
is secured by a specific asset or value or other stores of wealth which get [Definition of secured bonds]
forfeited if the lendee doesn't pay back the lender on time and in accord with
the terms of the debt deal example the dung and the restless' is a company that [Sign for 'The Dung and the Restless']
makes fertilizer by collecting old political speeches and grinding them up [Speeches going into the grinding machine]
selling them to farmers in the Midwest you know for a coin but they also own a [Tractor spraying crops]
pork farm which is kind of separate from their main fertilizer biz they need [Hogs Gone Wild logo appears]
money to build a bigger grinder because politicians are giving more speeches
these days you the internet and all that and they [Politician being applauded]
pledged their pork farm as collateral behind that secured bond offering that [Collateral sign on the pork farm]
is if they don't pay back the bond interest and principle on time then they
lose the pork farm to the lenders yeah and that would be a pig mistake... [Guy snorts like a pig]
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