Contingent Guarantee

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.



comments powered by Disqus
Hot Definitions
  1. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another market so that it balances out. So when examining a specific market, if all other markets are in equilibrium, Walras' Law asserts that the examined market is also in equilibrium.
  2. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will respond similarly to a marketing action. Market segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another.
  3. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following:
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction.
  5. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious debt when government leaders use borrowed funds in ways that don't benefit or even oppress citizens. Some legal scholars argue that successor governments should not be held accountable for odious debt incurred by earlier regimes, but there is no consensus on how odious debt should actually be treated.
  6. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares.
Trading Center