Letter Of Guarantee

AAA

DEFINITION of 'Letter Of Guarantee'

1. A type of contract issued by a bank on behalf of a customer who has entered a contract to purchase goods from a supplier and promises to meet any financial obligations to the supplier in the event of default.

2. A document issued by a bank on behalf of a call writer guaranteeing that the writer owns the underlying asset and that the bank will deliver the underlying securities should the call be exercised.

INVESTOPEDIA EXPLAINS 'Letter Of Guarantee'

A letter of guarantee often helps firms conduct business with parties they would never normally get the chance to deal with. Many suppliers will often choose to do business with customers that have a letter of guarantee because it eliminates the risk that they will not receive the appropriate payment for the goods that they are selling.

Additionally, call writers will often use a letter of guarantee when the underlying asset of a call option is not held in their brokerage account.

RELATED TERMS
  1. Bank

    A financial institution licensed as a receiver of deposits. There ...
  2. Default

    1. The failure to promptly pay interest or principal when due. ...
  3. Default Risk

    The event in which companies or individuals will be unable to ...
  4. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a ...
  5. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific ...
  6. Actual Authority

    Specific powers, expressly conferred by a principal (often an ...
Related Articles
  1. What Is International Trade?
    Personal Finance

    What Is International Trade?

  2. Principal-Protected Notes: Hedge Funds ...
    Options & Futures

    Principal-Protected Notes: Hedge Funds ...

  3. What's the difference between a bank ...
    Investing

    What's the difference between a bank ...

  4. Stock Safety: Top 3 Ways to Limit Your ...
    Options & Futures

    Stock Safety: Top 3 Ways to Limit Your ...

Hot Definitions
  1. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  2. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  3. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  4. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
Trading Center