Contingent Guarantee

AAA

DEFINITION of 'Contingent Guarantee'

A guarantee of payment made by a third party, known as the guarantor, to the seller or provider of a product or service in the event of non-payment by the buyer. Contingent guarantees are normally used when the suppliers do not have a relationship with their counterpart. The buyer pays a contingent guarantee fee to the guarantor, which is generally a large bank or financial institution.

INVESTOPEDIA EXPLAINS 'Contingent Guarantee'

Contingent guarantees are a common feature in international trade, especially when vendors conduct business with new customers in overseas markets. Note that a contingent guarantee differs from a letter of credit (LC), which is more commonly used in international trade. The former only comes into effect upon non-payment after a stipulated period by the buyer, whereas a letter of credit is payable by the bank as soon as the seller effects shipment and satisfies the terms of the LC.


Contingent guarantees are also used as a risk-mitigation tool for large projects in nations with a high degree of political or regulatory risk, as well as in certain income-oriented financial instruments.

RELATED TERMS
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a ...
  2. Contingent Liability

    A potential obligation that may be incurred depending on the ...
  3. Creditor

    An entity (person or institution) that extends credit by giving ...
  4. Lien

    The legal right of a creditor to sell the collateral property ...
  5. Contingent Asset

    An asset in which the possibility of an economic benefit depends ...
  6. Debtor

    A company or individual who owes money. If the debt is in the ...
RELATED FAQS
  1. Who uses bills of exchange?

    Bills of exchange primarily act as promissory notes in international trade; the seller, or exporter, in the transaction addresses ... Read Full Answer >>
  2. 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 Full Answer >>
  3. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  4. Which is more important to a nation's economy, the balance of trade or the balance ...

    There is no question the composition of a country's balance of payments is more important than its balance of trade. This ... Read Full Answer >>
  5. What is the difference between cost and freight (CFR) and cost, insurance and freight ...

    The difference between cost and freight (CFR) and cost, insurance and freight (CIF) is essentially the requirement under ... Read Full Answer >>
  6. What is the difference between Cost and Freight (CFR) and Free on Board (FOB)?

    The difference between cost and freight (CFR) and free on board (FOB) lies in who has responsibility for various shipping ... Read Full Answer >>
Related Articles
  1. Economics

    What Is The Balance Of Payments?

    The balance of payments helps countries to track how much money is coming in and how much money is going out. Learn more about BOPs here.
  2. Personal Finance

    What Is International Trade?

    Everyone's talking about globalization, so we explain what is it and why some oppose it.
  3. Options & Futures

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
  4. Forex Fundamentals

    How Petrodollars Affect The U.S. Dollar

    We examine the rise of petrodollars, their influence on the USD as a global reserve currency, and their effects on the U.S. markets.
  5. Investing

    Some Overseas Markets May Prove More Resilient

    Though global markets sold off and have continued to slip in recent days, stocks in Europe and Japan are still faring better than their U.S. counterparts.
  6. Investing

    Is There Still Opportunity in Japanese Stocks?

    Japanese stocks’ strong performance has prompted market watchers to question whether there’s still a case for adding exposure to the Land of the Rising Sun
  7. Economics

    How Does China Manage Its Money Supply?

    Here's how the Central Bank of China manages its currency rates and the money supply.
  8. Forex Strategies

    Three Currencies Benefiting From Low Oil Prices

    The Indian rupee is clearly the biggest beneficiary of the slide in oil prices, followed by the Indonesian rupiah and British pound.
  9. Economics

    Global Impact of China's Geopolitical Strategy

    China's geopolitical strategy is shifting the status quo from the Pacific to the Pentagon. Can the U.S. keep pace with Chinese military innovation?
  10. Economics

    What Happens to the Economy If China Deleverages

    Attempts to deleverage and institute reforms that will foster more sustainable growth could exacerbate an already slowing Chinese economy.

You May Also Like

Hot Definitions
  1. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  2. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  3. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  4. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  5. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  6. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!