A:

Bank guarantees and medium term notes (MTNs) are different types of instruments that serve different purposes for corporations. Bank guarantees are instruments issued by a bank or other lending institutions ensuring that the money owed by a debtor will be paid. In other words, the bank or lending institution is promising to be liable if the customer fails to meet their obligations. On the other hand, MTNs are specific bond-like debt securities with maturity values of nine months to 30 years. Since 1983, companies have used MTNs to raise funds in a way that is similar to debt offering. Most MTNs are non-callable, unsecured and have fixed rates.

U.S banks generally do not issue bank guarantees, but issue other types of promissory notes that are intended to fulfill the same function. Instead of bank guarantees, U.S banks issue standby letters of credit (SLOC), which are heavily used in international trade. Under section 415 of the Securities Exchange Commission (SEC) rules, approved banks issue MTNs to approved investment banks and brokerage houses. They, in turn, trade the MTNs with institutional investors, who issue them to retail investors. Bank guarantees and letters of credit can also be traded between institutions but the underlying component in their valuation is the creditworthiness of the nonbanking company.

For a comprehensive review of fixed-income securities, refer to CFA Level 1- Fixed Income Investments.

This question was answered by Chizoba Morah.


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