Role of Bond

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Role of Guarantees/bonds in international trade

A bank guarantee is an irrevocable obligation of a bank to pay a sum of money to the beneficiary in the event of non-performance of a contract by its customer, the principal. Like letters of credit, performance bonds and advance repayment guarantees are being increasingly used in international trade to secure international financial obligation.

A buyer, to assure himself of the due performance of the sales contract by the seller, may call for the seller to provide a performance bond through his bankers in favor of the buyer, undertaking to compensate the buyer to a certain extent. Similarly, a seller may call upon the buyer to furnish a bank guarantee to a given extent of the sales contract, in the event of the buyer failing to establish satisfactory letter of credit by a given date.

There are four types of guarantees/bonds.

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