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. Lien

    The legal right of a creditor to sell the collateral property ...
  2. Contingent Liability

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

    An asset in which the possibility of an economic benefit depends ...
  4. Creditor

    An entity (person or institution) that extends credit by giving ...
  5. Unsecured Creditor

    An individual or institution that lends money without obtaining ...
  6. Upstream Guarantee

    A contingent liability on a subsidiary's financial statements ...
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. Does raising the minimum wage increase inflation?

    There are conflicting views on whether raising the minimum wage increases inflation. Tied to this is the question of what ... Read Full Answer >>
  4. How do open market operations affect the money supply of an economy?

    The open market operations conducted by the Federal Reserve affect the money supply of an economy through the buying and ... Read Full Answer >>
  5. What risks does a business owner face under a business structure with unlimited liability?

    The risks that a business owner faces under a business structure with unlimited liability are literally unlimited, but they ... Read Full Answer >>
  6. What is affected by the interest rate risk?

    Interest rate risk is the risk that arises when the absolute level of interest rates fluctuate. Interest rate risk directly ... 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. Economics

    Understanding Delivery Duty Unpaid (DDU)

    Delivery duty unpaid (DDU) is a legal and international shipping term.
  5. Economics

    When Global Economies Converge

    The Divergences in global economic look very much like an explanation for what happened last year, though market observers continue to tout about it.
  6. Investing

    Why To Look For Opportunities Overseas

    While U.S. equities can continue to climb and post further gains before the end of the year, the best opportunities may still reside outside the country.
  7. Investing

    Do Record Stock Highs Signal A Top?

    Despite higher rates, U.S. stocks have been posting new records in recent weeks, despite investor concerns about slowing U.S. corporate profit growth.
  8. Economics

    West Coast Vs. East Coast Economy

    The East’s focus on finance and banking contrasts the West’s drive toward technological innovation. But one thing is clear--each knows it needs the other.
  9. Investing Basics

    What is a Nominal Value?

    The nominal value of a security, such as a stock or bond, remains fixed for the duration of its life.
  10. Economics

    Explaining the Human Development Index

    The Human Development Index (HDI) is a metric developed by the United Nations to take the emphasis off economic growth and focus on human wellbeing.

You May Also Like

Hot Definitions
  1. Fracking

    A slang term for hydraulic fracturing. Fracking refers to the procedure of creating fractures in rocks and rock formations ...
  2. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  3. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  4. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  5. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  6. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
Trading Center