Blog Home / Financial Terms / What are Guarantees?

What are Guarantees?

In guarantees, a third party is involved who agrees to fulfil the contractual requirements if the obligor fails to do so.

What are Guarantees?

Similar to collateral, guarantees are used to minimise the credit risk. In this, a third party is involved which gives an assurance of fulfilling the contractual requirements, if the required party failed to fulfil that. It is usually referred to as a financial guarantee which means that the party giving the promise will have to make a financial payment to fulfil the contractual requirements.

Examples

It is widely used in Central Governments giving guarantees to public sector entities. As governments are at the highest level of credit rating, this uplifts the financial contract significantly and reduces the credit risk of the public sector entity significantly.

Owais Siddiqui
1 min read
Related:
Financial TermsCPD
Dow Theory: Understanding the Primary Trend and the Secondary Trend
Sagar Pujari 04 July 2022
Financial TermsFRM
What is Standard Deviation?
Owais Siddiqui 19 September 2022
Financial TermsFRM
Hedging,Types and Importance
Owais Siddiqui 19 September 2022
Financial TermsFRM
What is Hedging?
Owais Siddiqui 19 September 2022
Financial TermsFRM
Variance
Owais Siddiqui 19 September 2022

Shares

Leave a comment

Your email address will not be published. Required fields are marked *