Character In Contract Surety Bond Underwriting

surety bond - What are the three underwriting characteristics of bonds - man in a laptop

What are the three underwriting characteristics of bonds?

  1. The issuer’s creditworthiness. Creditworthiness measured by a bond’s credit rating reflects an issuer’s ability to pay interest and principal on time. Ratings are typically made public by independent agencies that provide them for large groups of issuers or sectors of the economy. 

For example, Standard & Poor assigns ratings to over 15,000 corporate issuers worldwide, while Moody assigns ratings for about 130,000 municipal-bond issuers in the U.S., including state governments and hundreds of cities and counties.

  1. The maturity date, or the time until repayment of principal. Maturity is a key attribute affecting a bond’s price and yield. In general, the longer the maturity, the higher the yield to compensate for taking on greater risk from prices fluctuating with changes in market interest rates. Yields on 30-year U.S. 

Treasury bonds are currently near historical lows, for example, less than 2% on March 5th, 2013 but still average around 4% over time. And yields on long-term corporate bonds are typically higher than those on comparable agency debt or Treasuries because investors require extra returns to compensate for greater risk that comes with buying bonds without the implicit backing of a government guarantee.

  1. Call features. Call features determine whether a bond may be retired before maturity, which affects the price investors would receive if they try to sell the bond before it matures. You can usually find this information in your fund’s prospectus or publicly available documents on the company’s website. If it is not provided, you should contact your financial professional for assistance.

What is a contract?

A contract is an agreement between two parties for deliverables. It can be written or verbal, but even if it is implied by the actions of the parties involved, it may still be enforceable as a legal document. 

Contracts can consist of things such as money, services provided, or products sold. Most contracts have terms and conditions which must be followed to maintain validity. If they are breached, the party who failed to meet their obligation has broken the terms of the contract and may be required to pay damages resulting from this breach.

What is a surety bond?

A surety bond is basically like an insurance policy. When you buy a house or sign on to any other contract for that matter car loan, cell phone contract, the company offering these contracts will normally require you to have a third party agree to pay a penalty if you breach the contract terms. 

This third party is referred to as your “surety”. Essentially they are saying, “if you don’t do what you said you would do in this agreement, we will take our ball and go home”, leaving the aggrieved company without recourse. The reason why companies request this of their customers is that it’s cheaper than taking someone to court over wrongdoing. 

In most home buyer cases, the home seller will require the buyer to purchase a surety bond for five percent of the total value of the contract.

What is the benefit of underwriting?

The benefit of underwriting is that you can tell a story about your brand while also raising funds for your organization. 

Underwriting enables an organization to directly connect with an audience by providing context and perspective around their brand, its products or service, and their industry. For example:

An ad agency implements Underwriting on an online magazine in order to promote its services and attract new clients. The ad agency offers historically accurate depictions of ancient civilizations using its unique photorealistic rendering technology and promotes this feature as a core differentiator from competitors in the space. A company that specializes in rendering photorealistic images of ancient civilizations for use in Hollywood blockbusters could boost their marketing efforts by promoting this aspect of their business through Underwriting.

What is a contract surety bond?

A contract surety bond is a three-party agreement between an obligee the person or organization requesting the work to be done, the principal the person or company that will perform the work, and the surety bond company also called a bonding company. 

The purpose of the contract surety bond is to guarantee that the principal will fulfill its obligations. A breach of contract may arise for many reasons, including failure to complete assigned tasks on time, poor workmanship, improper billing practices, or non-adherence to local building codes.

The cost of a contract surety bond varies depending on who issues it and whether it is ordered by an individual or business. Contractors often order these bonds in advance so they are ready when required. Contract surety bonds are ordered directly from the surety bond company. The principal may also order a contract surety bond, although he or she must contact the bonding company for information on how to get one.

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