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What is a Surety Bond?
A surety bond is a contract that is held between at least three different parties. They would include the principal, the obligee and the surety. The principal is the primary person who is going to perform the contractual obligations. The obligee is the person who is the recipient of the obligation and the surety is the person who makes sure that the principal follows through on his or her obligations.
In Europe, surety bonds are issued by banks and they are referred to as “Bank Guarantees” in English and in French speaking countries, “Caution”. These banks pay out cash to the limit of guarantee just in case the principal defaults on his obligations to the obligee.
With a surety bond, the surety makes certain to uphold the contractual obligations that are set forth in the contract. This is for the benefit of the obligee. The contract is created to entice the obligee to work with the principal. This would be to demonstrate that the principal is credible and to guarantee the performance and completion of the agreement.
The principal agrees to pay an annual premium in exchange for the bonding company’s financial clout to ensure surety credit. If there is a claim, the surety is obligated to investigate it. If the claim is found to be valid then the surety will pay the claim and then seek reimbursement from the principal plus any legal fees that may have been incurred.
If the principal defaults AND the surety is not able to pay the claim then the bond is nugatory or is not valid.
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Related Articles at Investing School:
- What is a Debenture?
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Bill of Exchange
A bill of exchange, also known as a draft, is a document that is written by the drawer to the drawee to pay money to a payee. The person who drafts the bill is called the drawer. The person that the bill of exchange is written for is called the drawee. And, the person to whom the bill of exchange is addressed to and to who is the person to receive payment is called the payee. It is, in essence, an order made by someone to another person to pay money to a third person.
Bills of exchange are used commonly in international trade. They are orders that are written by one person to his bank ordering the bank to pay the bearer the amount specified on a certain date. These were also commonly used before paper currency was readily available. They are, however, not used very often nowadays in place of paper currency.
The parties involved in a bill of exchange do not need to be three separate people. A person can draw on himself payable to his own order.
A bill of exchange may endorse in favor of another party, who may then turn around and endorse it to another party and so forth. The “holder in due course” is able to claim the amount of the bill against the drawee and all of its former endorsers. The bill is “negotiable” and that is what is meant by being able to do the above. There are some cases where a bill is marked “not negotiable”, however.
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Related Articles at Investing School:
- Ins and Outs of a Stock Exchange
Economy of Scale
Economies of scale happen when a business expands and it is able to streamline its production costs in the process. There are factors that cause production costs per unit to decrease while the scale is increased. When this happens, this is when economies of scale have been achieved. So, there is an assumption that as a company grows and units of production are increased then it will have a better opportunity to decrease its costs.
Adam Smith, father of modern economics, said that the division of labor and specialization would be the way to achieve a larger return on production. This meant that employees would be able to concentrate on their specific task. This would suppose that over time, the employees skills and proficiency with that particular task would increase which would save time and money all the while production levels are increased.
In addition to specialization and division of labor, a company will have various inputs that may also result in the production of goods or services and where you can find additional economies of scale. They are:
- Lower input costs: If a company buys in bulk, they are able to take full advantage of volume discounts.
- Costly inputs: There are some inputs that are initially expensive but their implementation can result in economies of scale over time. For example, marketing and advertising and managerial advice are expensive, however, they can eventually lead to a lowering of the average cost of production and selling through innovation or ideas on efficiency, etc.
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Related Articles at Investing School:
- Adjustable Rate
Debt
assets, moral obligations and of course the one we all know well, money.
Debt can be used as a means of purchasing assets when you do not have the funds to cover it at the present time. There are many companies and corporations that use debt as a financial tool or strategy to make money.
When a creditor agrees to lend money or assets to someone – a debtor then a debt has been created. In this day and age, we think of debt as being tied to repayment in the form of money. This is usually the agreement between the creditor and the debtor. However, this has not always been the case. In the past, indentured servants repaid their debt through work or labor to their employer or creditor, more specifically. Their employer provided a contract and there would be a certain time period that the work or labor was expected and at the end of the period the debt was repaid.
There are different kinds of debt. For example, a company may use various kinds to fund its operations. It may choose to use secured or unsecured debt, private or public debt and or syndicated and bilateral debt.
The origin of the word comes from the French language – dette. And, from that it came from Latin – debere which means to owe.
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Related Articles at Investing School:
- What is a Debenture?
What is a Balance Sheet
A equity starting from a specific date. It is often regarded as a picture or a snapshot of a company’s financial health. There are four basic financial statements, but the balance sheet is the only one that refers to a single point in time.
A balance sheet for a company comes in three separate parts. It will have assets, liabilities and ownership equity. The categories for assets will usually be listed in order of liquidity. After assets, you will have liabilities. When you subtract the company’s liabilities from the company’s assets then you come up with equity or the net assets.
It is also possible to look at this formula from a different vantage point. You can say that assets are actually equal to liabilities and then add owner’s equity. Visually on the balance sheets, you would see on the assets in one section and then you see liabilities and net worth in another section. These two sections will be “balancing” each other.
You can see the values of each account in the balance sheet in a system referred to as the double entry bookkeeping system.
If a business only works using cash then it can measure its profits by taking out the entire bank balance at the end of the period and add any cash that they may have in hand.
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Related Articles at Investing School:
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Economic Data and Earnings Schedule for June 14, 2010
Monday will be a quiet day on the economic news front. No economic data is scheduled to be released for the U.S. on Monday.
Federal Reserve member James Bullard will be in Tokyo to speak about the global recovery at 5:15 am (US ET)
Earnings:
Before the Open:
CHDX
After the Close:
KFY, LZB, MDZ, RENT
Market video for June 13, 2010 is available for viewing on the ‘market video’ page
Greece Downgraded To Junk
Moody’s has downgraded the governments bonds of Greece to Junk status, cutting the rating four notches to BA1.
Bank Failure – Washington First International Bank – Seattle
A slow week for the FDIC, only one bank failure for week ending June 11, 2010:
Washington First International Bank, Seattle, Washington, was closed today by the Washington Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with East West Bank, Pasadena, California, to assume all of the deposits of Washington First International Bank.
The four branches of Washington First International Bank will reopen during normal business hours beginning Saturday as branches of East West Bank. Depositors of Washington First International Bank will automatically become depositors of East West Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of Washington First International Bank should continue to use their existing branch until they receive notice from East West Bank that it has completed systems changes to allow other East West Bank branches to process their accounts as well. {…}
{…} As of March 31, 2010, Washington First International Bank had approximately $520.9 million in total assets and $441.4 million in total deposits. East West Bank will pay the FDIC a premium of 0.5 percent to assume all of the deposits of Washington First International Bank. In addition to assuming all of the deposits of the failed bank, East West Bank agreed to purchase approximately $501.0 million of the failed bank’s assets. The FDIC will retain the remaining assets for later disposition.
The FDIC and East West Bank entered into a loss-share transaction on $418.8 million of Washington First International Bank’s assets. East West Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. {…}
Information for customers of Washington First International Bank
Bank failures for previous week ending June 4, 2010:
Tier One Bank, Lincoln, NE
Arcola Homestead Savings Bank, Arcola, IL
First National Bank, Rosedale, MS
Extend and Pretend – Financial Crisis to Political Crisis – Guest Post
I am pleased that Gordon Long has allowed me to publish his recent ‘Extend & Pretend’ series here for you.
{…} When the financial crisis arrived in 2008, those who foresaw it in 2007 were not only prepared to capitalize on it, but ready to position for the economic crisis that they knew lay ahead. We are currently still in the midst of an economic crisis evidenced for some time by slowing global trade, unemployment, falling tax revenues and more recently, a sovereign debt crisis. {…}
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HISTORICAL FACT: A Financial Crisis is almost always followed by an Economic Crisis which is subsequently followed by a Political Crisis.
Extend and Pretend – A Guide to the Road Ahead
Robert Reich – A Keynesian Love Affair
Robert Reich, professor at the University of California at Berkeley and former labor secretary under President Bill Clinton has gone completely mad.
Mr. Reich wrote on his blog Friday that he thinks more Keynesian economic policy actions are needed to rescue the economy.
{…} For three decades, starting in the late 1970s, the biggest economic problem America faced on an ongoing basis was inflation. Demand always seemed to be on the verge of outrunning the productive capacity of the nation. The Fed had to be ready to raise interest rates to stop the party, as it did on several occasions.
During this era of inflation economics, it appeared that John Maynard Keynes – and his Depression-era concern about chronically inadequate demand — was dead. So-called “supply siders” told policy makers that if they cut taxes on corporations and the wealthy, they’d unleash a torrent of investment and innovation – thereby increasing the productive capacity of the nation. The benefits would trickle down to everyone else.
But the pendulum may now be swinging back to the earlier era in which demand always seems on the verge of trailing the nation’s productive capacity. The biggest ongoing threats are chronic recession or even deflation, because consumers don’t have enough money to what the economy is capable of selling at full or near-full employment. Despite gains in productivity, little has trickled down to America’s middle class. {…}
{…} Keynes prescribed two remedies – both of which are now necessary: Government spending to “prime the pump” and get businesses to invest and hire once again. And, as Keynes wrote, “measures for the redistribution of incomes in a way likely to raise the propensity to consume.” Translated: Instead of big tax cuts for corporations and the rich, tax cuts and income supplements for the middle class. (Source: Robert Reich Blog)
For those unfamiliar with Keynesian economics it is at its core a principal of big government spending in order to make up for inefficiencies in the private sector. In other words, spend lots of money to goose the economy. The name Keynesian comes from the British economist John Maynard Keynes.
The problem with the Keynesian concept is that it only makes the macro conditions worse by creating an economy that is dependent on government stimulus to stay afloat, while at the same time creates massive deficits that become unmanageable such as what we have now.
It has been said countless times, especially during presidential campaigns, that the nation will pass down its debt to our children and grandchildren. This is no longer true, it is the current generation that is burdened with the debt of the nation. Mr. Reich advocates more government spending to ‘prime the pump’ as he calls it. But Mr. Reich, the pump is clogged with debt and only adding more debt will eventually kill the machine entirely when the United States goes so far into debt that it jeopardizes the credit worthiness of the nation.
More government spending in hopes it can buy its way out of poverty is foolish and dangerous. I contend that policy decisions over the past few decades were all forms of Keynesian economic theory. The relaxation of leverage rules allowing for banks and other financial institutions, the repeal of the Glass-Steagall act, the drive to make home ownership available to anyone by looking the other way when mortgage fraud was running rampant. These few examples are all part of a Keynesian mindset, which is to make money easier to get… to keep the pump primed, again using your words.
But where did that get us Mr. Reich? the ‘pump’ got so jammed up with debt that it seized up and the economy came to a screeching halt. The solution can not be more of the same policies that led to the disaster. The solution is to remove the debt that which is clogging the pump. That would mean more hardship for the economy as banks, big business, and governments alike take their losses and wipe the slate clean, essentially starting over but this time at levels that the private sector ‘pump’ can run on its own. Keynesian economics is like bad motor oil, it may loosen things up for a while, but over time that oil turns into sludge and it must be dealt with.
Mr. Reich, we agree that the nation is and will be in a recessionary environment for a very long time, but we are at opposite ends of the planet on how to remedy it. I want a solution that fosters organic and sustainable growth, your solution of more of the same is akin to injecting RedBull and caffeine into the veins of the economy to speed it up. But you know what happens to people when they drink RedBull? They usually come crashing down after the effects wear off.
The economy of the United States, and many other nations have now seen what a Keynesian policy does, the hard way. And the idea of just continuing the “same as before” policy will destroy the nation in the end.
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