A:

A bank guarantee is a promise from a bank or lending institution that, if a borrower defaults on repayment of a loan, the bank will cover the loss. A bond is a debt instrument in which an investor loans money to a corporation or government institution in return for some amount of interest earned over the life of the bond. So, while a bond is essentially a loan issued by an entity and invested in by outside investors, a bank guarantee is a promise that can be included in a bank loan.

Bonds are used by corporations, governments or municipalities to raise money and finance needed projects. An entity issues a bond at a par value, usually in denominations of $100, with a stated coupon rate around 5%. An investor effectively lends the bond for $100 and receives coupon payments from the corporation, government or municipality issuing the bond until the $100 par value is repaid by the entity that borrowed the money.

A bank guarantee, on the other hand, is not a debt instrument or a loan in itself. It's a guarantee by a lending institution that if a borrower defaults on its liabilities or obligations, the bank will cover the costs. A bank guarantee is a provision that can be placed in a bank loan prior to the bank loaning out the money. A bank guarantee encourages companies and private consumers to make purchases they otherwise would not make, which increases business activity and consumption, and gives people entrepreneurial opportunities.

For further reading, check out our Bond Basics Tutorial.

 

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