A:

Bank guarantees and medium term notes (MTNs) are different types of instruments that serve different purposes for corporations. Bank guarantees are instruments issued by a bank or other lending institutions ensuring that the money owed by a debtor will be paid. In other words, the bank or lending institution is promising to be liable if the customer fails to meet their obligations. On the other hand, MTNs are specific bond-like debt securities with maturity values of nine months to 30 years. Since 1983, companies have used MTNs to raise funds in a way that is similar to debt offering. Most MTNs are non-callable, unsecured and have fixed rates.

U.S banks generally do not issue bank guarantees, but issue other types of promissory notes that are intended to fulfill the same function. Instead of bank guarantees, U.S banks issue standby letters of credit (SLOC), which are heavily used in international trade. Under section 415 of the Securities Exchange Commission (SEC) rules, approved banks issue MTNs to approved investment banks and brokerage houses. They, in turn, trade the MTNs with institutional investors, who issue them to retail investors. Bank guarantees and letters of credit can also be traded between institutions but the underlying component in their valuation is the creditworthiness of the nonbanking company.

For a comprehensive review of fixed-income securities, refer to CFA Level 1- Fixed Income Investments.

This question was answered by Chizoba Morah.

RELATED FAQS
  1. How does a company obtain a bank guarantee?

    Find out how bank guarantees work, why they are issued and the process that a business normally goes through to acquire one ... Read Answer >>
  2. What is the difference between a bank guarantee and a bond?

    Understand what a bank guarantee is and what a bond is, and which one is a debt instrument. Learn the differences between ... Read Answer >>
  3. What's the difference between a bank guarantee and a letter of credit?

    Letters of credit ensure that a transaction proceeds as planned, while bank guarantees reduce the loss if the transaction ... Read Answer >>
  4. What's the difference between a letter of credit and a bank guarantee?

    Learn how letters of credit and bank guarantees differ, how they are used by banks and companies, and how buyers apply to ... Read Answer >>
  5. What factors are the primary drivers of banks' share prices?

    Find out which factors are most important when determining the share price of banks and other lending institutions in the ... Read Answer >>
  6. Can entities other than banks issue letters of credit?

    Obtaining a letter of credit from a non-bank is legally acceptable according to the ICC, but companies tend to prefer to ... Read Answer >>
Related Articles
  1. Personal Finance

    Retail Banking Vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers.
  2. Insights

    Overnight Rate

    Learn about how banks use this interest rate when lending to other banks.
  3. Insights

    The World's Top 10 Banks

    Learn more about the world's largest banks and how more financial power shifts eastward as China is home to four of the world's largest banks.
  4. Investing

    Banking Stress Tests: Would Yours Pass?

    In weaker economic times, banks may be tested by the government to see how safe they are.
  5. Personal Finance

    Banking Has Changed: What Does It Mean For Consumers?

    Banks have long been leading spenders on technological innovations. Learn the key changes in the banking industry and what institution is right for you.
  6. Investing

    What is a Bank?

    A bank is a financial institution licensed to receive deposits or issue new securities to the public.
  7. Investing

    Will the Next Financial Crisis Come From Europe? (DB, CS)

    Discover why the European financial system might be in trouble, why the European Central Bank may turn to bailouts, and why that is probably a mistake.
  8. Insights

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
  9. Investing

    What's a Correspondent Bank?

    A correspondent bank is a bank that acts on behalf of another bank, usually a foreign bank.
RELATED TERMS
  1. Medium Term Note - MTN

    1. A note that usually matures in five to 10 years. 2. A corporate ...
  2. Bank Guarantee

    A guarantee from a lending institution ensuring that the liabilities ...
  3. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a ...
  4. Equity Commitment Note - ECN

    A type of mandatory convertible bond issued by a bank or other ...
  5. Letter Of Guarantee

    1. A type of contract issued by a bank on behalf of a customer ...
  6. Guarantee Company

    A form of corporation designed to protect members from liability, ...
Hot Definitions
  1. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  2. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  3. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  4. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  5. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  6. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
Trading Center