DEFINITION of 'Avalize'

To avalize is the act of having a third party (usually a bank or lending institution) guarantee the obligations of a buyer to a seller per the terms of a contract, such as a promissory note or purchase agreement. The bank, by "avalizing" the document (usually "by aval" will be written on the document itself), acts as a cosigner with the buyer in the transaction.

BREAKING DOWN 'Avalize'

To avalize means "to give one's accord". While rarely used, it can be an effective method of securing the rights of the receiving party in the transaction. This is an obligation that a bank will only take on with lucrative customers. It is seen as an act of good faith by both parties.

Examples that use avalize include working with a promissory note. A promissory note is a debt instrument that allows companies and individuals to obtain financing from a source other than a bank (although banks will also issue them on occasion). This alternative financing source may be an individual or a company willing to carry the note under agreed-upon terms. These terms typically pertain to indebtedness, including as the principal amount, interest rate, maturity date, date and place of issuance, and issuer's signature. Since anyone can conceivably issue a promissory note, avalizing with a third party can add an extra layer of security.

Avalizing and purchase agreements

In addition to supporting the creation of promissory notes, avalizing can come 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 but not limited sale price, bond interest rate, bond maturity, bond 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 retiring. As with a bond purchase agreement and promissory note, the cross purchase agreement document outlines specific terms. In this case it is how shares will be divided or purchased by the remaining partners.

A matched sale-purchase agreement is an arrangement in which the U.S. Federal Reserve (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. The purpose of this is to decrease banking reserves.

In all of these cases the ability to avalize comes in handy for additional security.

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

    In a Matched Sale-Purchase Agreement, the Federal Reserve sells ...
  2. Heads of Agreement

    Heads of agreement is a non-binding document that outlines the ...
  3. Term Bond

    Term bonds mature on a specific date in the future and the bond ...
  4. Credit Agreement

    A credit agreement is a legally binding contract documenting ...
  5. Option Agreement

    An option agreement is a legal contract between two parties outlining ...
  6. Cross-Purchase Agreement

    A cross-purchase agreement is a document that allows a company's ...
Related Articles
  1. Investing

    Basics Of Federal Bond Issues

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

    7 Common Bond-Buying Mistakes

    Find out how to avoid the costly mistakes made in bond portfolios everywhere. Learn to minimize the risk of suffering low or negative returns when trading.
  3. Investing

    Why Bond Prices Fall When Interest Rates Rise

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

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  5. 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.
  6. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  7. Investing

    6 Ways That Investors Use Bonds

    Learn how the stodgy stereotype of bonds can overshadow the basic and advanced uses of what these investments can do for your portfolio.
  8. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  9. Investing

    5 Fixed Income Plays After the Fed Rate Increase

    Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.
RELATED FAQS
  1. What is the difference between a bill of exchange and a promissory note?

    Learn what bills of exchange and promissory notes are, along with notation of the primary differences between these two documents. Read Answer >>
Trading Center