DEFINITION of 'Aval'

Aval is a guarantee that a third party adds to a debt obligation. This third party is not the payee or the holder, but ensures payment should the issuing party default. The debt obligation could be a note, bond, promissory note, bill of exchange or draft. The third party providing the aval is usually a bank or other lending institution.

BREAKING DOWN 'Aval'

Since avals can be forged, all parties should take caution when accepting these notes. Banks usually only provide an aval to issuers with very good credit ratings. The process of avalizing mainly occurs Europe; in the United States, banks have restrictions as to what instruments they may use to provide aval.

While avals have a range of functions, they can come particularly in handy with a range of purchase agreements, including a bond purchase agreement, cross purchase agreement, and matched sale-purchase agreement.

A bond purchase agreement is a legally binding document between a bond issuer and an underwriter, which outlines the terms of a bond sale, including the sale price, interest rate, maturity, redemption provisions, sinking fund provisions, and reasons why the agreement may be canceled. A cross-purchase agreement allows a company's major shareholders to purchase the interest or shares of a partner who has deceased, has become incapacitated, or who is retiring.

A matched sale-purchase agreement is an arrangement in which the U.S. Federal Reserve (the Fed) sells government securities (U.S. Treasuries) to an institutional dealer or the central bank of another country. The party purchasing U.S. treasuries will agree to sell them back to the Fed within a short period of time (generally two weeks or less). The Fed repurchases the Securities for the same price at which they originally sold them to decrease banking reserves.

In all of these cases, the ability to avalize comes in handy for additional security purposes. Particularly when dealing with large sums that multiple stakeholders rely on, having an external bridge of support can bolster the deal.

Aval and Credit Ratings

As mentioned above, banks often only provide avals to issuers with good credit ratings. Companies, municipalities, and even sovereign nations can rack up stronger ratings by taking on loans and paying them off in a complete and timely manner, along with a range of other tactics. Credit rating agencies such as Standard & Poor’s (S&P), Moody’s, or Fitch generally carry out credit assessments. Each entity that seeks a credit rating for itself or for one of its debt issues will pay an agency to do this.

RELATED TERMS
  1. Matched Sale-Purchase Agreement ...

    In a Matched Sale-Purchase Agreement, the Federal Reserve sells ...
  2. Credit Market

    Credit markets are where investors go to buy bonds, mortgages, ...
  3. Shared Equity Finance Agreements

    When two parties purchase a primary residence because one party ...
  4. Debt Issue

    A debt issue is a financial obligation that allows the issuer ...
  5. Trading Partner Agreement

    A trading partner agreement is an agreement drawn up by two parties ...
  6. Credit Rating

    A credit rating is an assessment of the creditworthiness of a ...
Related Articles
  1. Investing

    What Is A Corporate Credit Rating?

    Is the bond you're buying investment grade, or just junk? Find out how to check the score.
  2. Investing

    The Basics Of Municipal Bonds

    Investing in municipal bonds may offer a tax-free income stream, but such bonds are not without risks. Check out types of bonds and the risk factors of muni-bond.
  3. Personal Finance

    The Power of Major Credit Rating Agencies

    The performance of major independent credit rating agencies is a controversial topic, particularly due to the strength of their influence.
  4. Investing

    Municipal bond tips for the Series 7 exam

    Learn to distinguish between general obligation and revenue bonds to ace the municipal bonds portion of the Series 7 exam.
  5. Investing

    Why Bond Prices Fall When Interest Rates Rise

    Never invest in something you don’t understand. Bonds are no exception.
  6. Investing

    Basics Of Federal Bond Issues

    Treasuries are considered the safest investments, but they should still be analyzed when issued.
  7. Investing

    Why You Shouldn't Trust Ratings From Rating Agencies

    When the U.S. debt was downgraded, what does that really mean?
  8. Financial Advisor

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
  9. Financial Advisor

    Rising Rates: What It'll Mean for Stocks and Bonds

    A look at what rising interest rates could mean for the equity and bond markets.
RELATED FAQS
  1. Who are the key players in the bond market?

    The bond market can essentially be broken down into three main groups: issuers, underwriters and purchasers. The issuers ... Read Answer >>
  2. How long are credit ratings valid?

    Learn how credit ratings are issued and how long they are valid. Investors look to credit ratings to determine risk associated ... 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. Interest Rate Risk Between Long-Term and Short-Term Bonds

    Find out the differences and effects of Interest rates between Long-term and short-term bonds. Read how interest rate risk ... Read Answer >>
Hot Definitions
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  2. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  3. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  4. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  5. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  6. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
Trading Center