What is a bond?
A bond is a financial instrument representing a loan given to a borrower by an investor. It is a fixed income and is given for a fixed period. The Corporate bond and municipal bond are the most common. Private companies, states, municipalities, and the government use bonds to finance projects and operations. They either be in private investing or mutual funds.
Why do companies issue a bond?
A bond acts as a loan. Companies issue loans to raise money. The investor promises to give a certain amount of money to a corporation for a specific period. In return, the investor gets interested. When the maturity date reaches, the corporation pays the investor the principal and the interest payments. Most companies consider issuing bond financing because it is less expensive and does not give company control to investors.
What is bond insurance?
It is also referred to as financial guaranty insurance. It is a type of coverage purchased by the bond issuer from an insurer that guarantees the principal and interest payment on a bond if the insurer defaults payment to bondholders. The issuer pays a premium either in installments or lump sum. Bond issuers purchase it for credit rating enhancement. This reduces the interest amount to be paid and makes the bond attractive to potential investors.
The insurer takes into account a borrower’s creditworthiness to determine the rating. The issuer gets a low credit rating when their creditworthiness is risky, making it difficult to attract investors. Companies undergo credit enhancement through bond surety to get a favorable rating for more investor’s attractions.
What does being bonded mean?
Being bonded means that a consumer is protected against incomplete or unsatisfactory work. A Bond protects a business from financial losses and losing clients. Clients request a surety bond as part of a contract to protect themselves. The bond has three sections these are:
- Surety – This is the underwriting company.
- Principal- The company purchasing the instrument.
- Obligee-The company asking about the instrument.
The most common types of bonds include the following:
1. Construction bond
A construction bond is also known as a permit or a license bond. The coverage indicates that a contractor agrees to comply with the government permit’s rules and regulations on a building. It acts as an assurance that the construction company will complete the job to their satisfaction. In case a problem arises after job completion, a client can file a claim for damage and repair payments against the bond. The contractor will be expected to reinforce the surety of the same amount.
2. Fidelity bond
A fidelity bond protects companies against theft and fraud accusations. It is commonly used in information technology sectors and has a first-party fidelity bond and a third-party fidelity bond.
3. Janitorial bond
Janitorial bond is commonly used in professional cleaning companies. The insurer compensates clients when they are not satisfied with the job, incomplete work, or theft.
What is the difference between being bonded and licensed?
A contractor’s license is a permit or a requirement to do skilled labor on a property. It is a requirement by the state, requiring the contractor to have a worker’s compensation policy for issuance. A contractor being bonded, on the other hand, means that they have acquired a surety bond. A surety bond is an assurance that protects a property owner. The bond provides compensation to a client when the contractor fails to satisfy or completed the job.
Benefits of being bonded:
a. Protection against financial loss
Your company is protected against financial losses since the insurer takes care of the damage to avoid out-of-pocket payment, which could strain your finances. Your business can end up bankrupt in case lawsuits are filed.
b. Clients compliance
The client wants to work with companies that deliver satisfactory work. Our coverage makes us competitive and attracts more investors to work with us.
c. You assure clients that your business is legit.
When clients are looking for companies to work with, they look for reputation and trusted ones in the business environment. We are a legit Bonded company are perceived that provides our clients with the appropriate coverage.
If your company is not bonded yet, we advise you to take the step to attain these benefits. Whether you are a small or a large business, we are here to help you protect yourself and your company through a bond. We advise you based on the following when taking a bond in your business.
- Which industry is your business operating in?
- Does your business handle digital data?
- Do you drive to work?
- Do you have employees?
It is important to understand bond insurance considerations. Below are the 3 considerations:
1. Price stability
Financial guaranty insurance can stabilize bond prices in hard economic times. The municipal bond reduces the municipal cost borrowing by reducing the default costs expected, improving the market liquidity and price stability. The Detroit bankruptcy and Puerto Rico’s unrest is one example related to price stability. In Puerto Rico’s case, the country has a $72 billion debt, of which the 13 billion dollars is insured, while Detroit defaulted several hundred million dollars debt.
The financial crisis in 2008 made bond insurers learn lessons to withstand stormy weather. The National bond company and the assured guarantee holders maintained their value as a whole because no negotiation expenses or time required to determine the Detroit bankruptcy. The Puerto Rico bond price stabilized than uninsured bonds. Individual investors benefited from the bond’s improved price stability because there were no expenses or time spent fighting for their shares upon defaults.
2. A municipal bond is not always ensured
An infrastructure bond and a municipal bond are the most insured coverage after the 2008 financial crisis, while others went bankrupt. Investors should not assume that a municipal bond is always insured. 60% of municipal bonds were insured before the financial crisis by nine insurers. The Reuters data states that by 2012 the number dropped to 3.6%. The percentage has increased to 6.6% and is expected to rise. Investors should not assume that a municipal bond is always insured. Reading through the prospectus can help you determine whether it is insured and the insurer. We are here to help you understand the prospector step-by-step so that you can be on the safe side. We also help you check municipalities and know the riskiness of the credit-ratings.
3. Bond insurance is not a guarantee
During a downturn such as the 2008 financial crisis, there’s no guarantee for financial guaranty insurance. The insurers are mostly dependent on credit ratings for their business operations. A decline in the credit rating may not allow them to secure businesses. Other insurers have been at risk of bankruptcy. Investors should keep these risks in mind, although they are rare. Getting detailed disclosures about the insurer helps investors to know the guarantee levels. We are a trusted company that discloses its principal, interest payments, and interest costs. We are a transparent company ready to give you our holding details.
The highlighted considerations are important for investors to avoid drawbacks and get better returns in the long run. We are a diverse company that offers bond coverage and other types of coverage for both commercial and individual. Below are some of our coverage:
- General liability
- Business auto
- Worker’s compensation
- Commercial umbrella
- Condo units
- Rental homes
- Personal umbrella
Call or visit Webb Group for more information about the bond and its performance. Our company’s representatives are always ready to help you and know how the bond can protect you.