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.


RELATED FAQS
  1. What is the difference between a bank guarantee and a bond?

    Understand what a bank guarantee is and what a bond is, and which one is a debt instrument. Learn the differences between ... Read Answer >>
  2. How does a company obtain a bank guarantee?

    Find out how bank guarantees work, why they are issued and the process that a business normally goes through to acquire one ... Read Answer >>
  3. What's the difference between a bank guarantee and a letter of credit?

    A bank guarantee and a letter of credit are similar in many ways but they're two different things. Letters of credit ensure ... Read Answer >>
  4. What's the difference between a letter of credit and a bank guarantee?

    Learn how letters of credit and bank guarantees differ, how they are used by banks and companies, and how buyers apply to ... Read Answer >>
  5. How is a bank guarantee different from a traditional loan?

    Read about the differences between a traditional bank loan and a bank guarantee, and why a third party might require a guarantee ... Read Answer >>
  6. What are the major categories of financial institutions and what are their primary ...

    Understand the various types of financial institutions that exist in today's economy, and learn the purpose each serves in ... Read Answer >>
Related Articles
  1. Investing Basics

    Retail Banking Vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers.
  2. Investing

    Overnight Rate

    Learn about how banks use this interest rate when lending to other banks.
  3. Investing

    Why Banks Don't Need Your Money to Make Loans

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
  4. Credit & Loans

    Banking Stress Tests: Would Yours Pass?

    In weaker economic times, banks may be tested by the government to see how safe they are.
  5. Investing Basics

    What is a Bank?

    A bank is a financial institution licensed to receive deposits or issue new securities to the public.
  6. Economics

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
  7. Economics

    What's a Correspondent Bank?

    A correspondent bank is a bank that acts on behalf of another bank, usually a foreign bank.
  8. Credit & Loans

    The Evolution Of Banking

    Banks are a part of ancient history. Find out how this system of money management developed into what we know today.
  9. Personal Finance

    The Pros And Cons Of Internet Banks

    Learn how internet banking services stack up against those of their brick-and-mortar peers.
  10. Economics

    A Brief History of U.S. Banking Regulation

    From the establishment of the First Bank of the United States to Dodd-Frank, American banking regulation has followed the path of a swinging pendulum.
RELATED TERMS
  1. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific ...
  2. Bank Guarantee

    A guarantee from a lending institution ensuring that the liabilities ...
  3. Letter Of Guarantee

    1. A type of contract issued by a bank on behalf of a customer ...
  4. Equity Commitment Note - ECN

    A type of mandatory convertible bond issued by a bank or other ...
  5. Business Banking

    A company's financial dealings with an institution that provides ...
  6. Bank

    A financial institution licensed as a receiver of deposits. There ...
Trading Center