bookmark_borderWho Issues Performance Bonds?

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Who Issues Performance Bonds?

Performance bonds are issued by financial institutions, contractors, or government agencies. The person issuing the bond is generally referred to as the surety or obligor. A performance bond ensures that a principal (the person receiving the services) will not have any out-of-pocket costs if a contractor fails to perform as promised. Performance bonds may be required for various reasons including:

Contracting parties frequently require this type of guarantee from parties with whom they contract, usually as a result of some misdeed in which one party has failed to fulfill its contractual responsibilities. Also known as an “indemnity bond,” this agreement requires a party who has entered into a contractual relationship with another party and who is financially responsible for problems with the project to reimburse the other party for any damages incurred.

A performance bond is an agreement whereby a third party guarantees that a person who has made an agreement with another will perform as promised, and agrees to pay costs arising from the failure of that person to fulfill their promise. The bond itself can be issued by a bank or insurance company. 

In construction projects, it is common for subcontractors to require performance bonds because they may not have adequate financial resources to complete the project in case of default by their employer. Performance bonds serve as good-faith security so that contractors have assurance from those with whom they contract as well as protection against lawsuits brought by owners or prime contractors seeking damages as a result of a default on the part of the contractor. 

Do insurance companies issue performance bonds? 

Yes, insurance companies issue performance bonds. They are known as surety bonds and provide the bond promise on the part of a contractor that they will perform according to their contract with another party. Performance bonds are designed to ensure that a principal who contracts with someone else is adequately protected if that other party fails to deliver as promised. 

In case of nonperformance by a subcontractor or supplier, the cost of meeting contractual obligations is transferred from those who fail to fulfill their commitments onto those who have guaranteed they will complete their promised services.

Some contractors might require a performance bond from a subcontractor, but only in cases where there is some concern about whether the subcontractor has sufficient assets or financial stability to meet its contractual obligation. Insurance companies may also be required to provide proof of financial stability when required by the client. If a contractor fails, an insurance company will fulfill any claims made against that party even if it requires the use of funds outside its normal operating budget.

Contractors and subcontractors may require performance bonds from each other in order to protect both parties interests and ensure that contractual obligations are fulfilled. The bond also offers protection to subcontractors and suppliers who might not otherwise have adequate resources or assets of their own against which they can use for restitution should the contractor fail to meet its commitments under the agreement. When businesses enter into agreements with contractors, they can request performance bonds as a condition for doing business with them.

Do banks issue performance bonds?

Yes, banks issue performance bonds. Banks provide financial instruments that guaranty a contractor will meet their obligations under an agreement and will pay any damages or costs of litigation arising from the failure to fulfill those obligations. The bond itself is issued by a bank and serves as a form of insurance for both parties in case one party fails to live up to their end of the contract. 

Insurance companies also provide these types of guarantees on behalf of contractors who may not otherwise have adequate resources or assets available with which to make restitution should they fail to fulfill their contractual agreements. In cases where there is some doubt about whether a subcontractor has sufficient funds or assets available against which they can use for restitution, performance bonds serve as good-faith security that protects both parties interests.

How much does a performance bond cost? 

The cost of a performance bond varies depending largely upon the nature and value of the contract involved. The higher the stakes, the more costly it will likely be for one party to guarantee that another will fulfill their obligations under an agreement. For example, a $10 million dollar contract would require a much larger performance bond than a $1 million dollar contract and might not even be obtainable from some banks or insurance companies because the amount is so high. 

Banks may also require evidence of financial stability from those seeking performance bonds so as to avoid having to pay out on claims arising from default by contractors who lack assets with which to make restitution for such claims. Banks or insurance companies charge fees based upon either a percentage of the total value of the bond or a flat rate fee for issuing the bond. 

A contractor seeking a $1 million dollar performance bond may therefore pay between 1 to 3 percent of the total value of the contract as an insurance premium, while if more than one subcontractor is covered under the same agreement they may be able to negotiate a group discount with their bank or insurer.

Visit Executive Surety Bonds to know more!

 

bookmark_borderWho Pays for a Performance Bond?

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Who pays for the performance bond in international commodity trading?  

The importer – and importers – do. Unfortunately, the buyer of the import often thinks the seller pays for the bond. That is why some industry players believe that as much as $1 billion (US) worth of commodities each year don’t move because buyers insist on shipping on an open account basis without a performance bond where they 

Open account means the buyer gets full control of the goods until they pay for them. The seller ships, and delivers to a carrier’s pier or warehouse, without any guarantee that he will be paid. When payment is made by letter-of-credit (L/C), it is usually paid after documents are presented to the bank. With open account trading, no documents are required nor any pre-shipment inspection (PSI) as part of an international trade transaction.

The importer makes a payment against L/C at its own bank which issues a post-shipment draft (or “nostro” transfer). But if there is no purchase order requiring a performance bond, then who pays?

The importer is the only party at risk for the non-performance of an import contract. If the seller has no money to back up his sales agreement, then the importer is out of pocket until it can bring legal action against the seller to recover its loss.

Who pays for the performance bond in commodity?  

To answer this question more precisely, the importer is free to choose a performance bond for a specific amount or percentage of the contract price. In most cases, it is 5% of the total value of goods purchased. 

In some countries including those in Latin America and Russia, payment against L/C alone may not be allowed. Even where it is allowed by law as in China, some banks prohibit their clients from paying upfront without a performance bond. In such cases, the customer has no option but to pay against L/C with a bank guarantee. The importer pays for the performance bond on both open account and letter-of-credit deals even though they are fundamentally different types of transactions.

Who pays for a performance bond?  

The importer is at risk for non-performance. In an open account transaction, the buyer uses its own cash to pay for the goods and to provide the seller with a Bid bond. Instead of the performance bond that’s required by most trading partners, you can use bid bonds or bid guarantees (deposits) which reduce the amount of capital needed by buyers and sellers for commodity transactions.

As always: consult your freight forwarder and attorney before submitting a bid to make sure you fully understand all risks involved. And it’s important to be aware that even if you partially buy or sell through open account terms, you still need a performance bond as well as other types of risk protection such as insurance to physical loss and damage.

Who pays for construction payment performance bond? 

In construction transactions, the typical requirement is a bid bond or performance bond which have been known as “surety bonds” for many years.

In the construction industry, most suppliers require a bid bond from their customers who are requesting bids on an open account basis with no performance bond upfront to secure a sales agreement. The typical request is that the client provides a bid guarantee at 5% of the total value of goods ordered.

Typically, the project owner or general contractor pays for performance bonds. However, the architect/engineer may require one from a subcontractor to ensure that it has funds to complete work in case its customer fails to pay.

Who pays for a payment performance bond? 

The buyer who has an agreement to purchase goods, real estate, or services submits its own money as security. The buyer can also be required to provide a bid bond or bid guarantee (deposit) which is a sum of money that represents a promise to pay by the bidder issuing it if that company isn’t awarded the work. 

A bid bond ensures that the bidder will have funds available should they win the bidding process. In this case, your contractor probably wants you as the customer to sign as co-obligor on the bid as well as himself so he can get his surety company involved in his bid submission through a Bid Bond type of performance bond.

What is a payment bond and who pays for it? 

A payment bond (also known as a contractor’s license and permit bond) is the most common type of surety bond required by contractors bidding on public works projects such as road work or building construction. It guarantees that they will pay the subcontractors, workers, and suppliers for labor and material used to complete their project according to contract specifications. 

Your contractor probably wants you as the customer to sign as co-obligor on his bid so he can get his surety company involved in his bid submission through a Bid Bond type of performance bond.

Visit Executive Surety Bonds to know more!

 

bookmark_borderWhy is Ponax Performance Worse than Other Bond Funds

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What is Ponax Performance?

Ponax is a bond fund that invests in high-quality, short-term bonds with some exposure to credit risk. The current portfolio is 70% AAA & AA rated. It has been stated by Ponax’s reps that the bond funds are “tax optimized”, but it does not seem so at first glance. All of their returns are taxable on an annual basis, which makes them pale in comparison to ETFs overtime on an after-tax basis.

Ponax Performance is an example financial model that seeks to show the performance of a typical bond fund. The point of this exercise is to compare its performance under diverse market conditions with that of other funds in the Market Vectors Intermediate Government/Credit Bond ETF (NYSEARCA: ICGB), which attempts to track the performance of one representative benchmark index, the Market Vectors US Intermediate Government/Credit Bond Index.

Unless stated otherwise, all references to dollars assume they are U.S. dollars (USD).

Why was Ponax Performance created?

The purpose is threefold

  • To demonstrate how expensive it can be for individual investors to purchase financial services; 
  • To provide practical examples of how various choices impact investing; and 
  • To help the world become a better place by using math.

How is Ponax Performance calculated?

It is based on monthly total returns of ICGB and SPY (the ETF version of the S&P 500), and it represents performance from 1/1/2005 through 12/31/2014:

There are two ways to interpret this chart:

  • First, you could say that next to U.S. Treasury bonds, which aren’t included in either portfolio, other bond funds have been flat at best over the past decade, but that the average investor has lost many times more than just their fees due to volatility drag.  “Volatility drag” refers to the impact of losses caused by price swings, and it is the enemy of retail investors.  As you can see, the orange line (Ponax) has been rising at a rate that would have made an investor unhappy if he or she had stayed in the fund over time.
  • The second way to interpret this chart is as a warning sign not to bet on any investment for ten years based on its past performance alone because there’s no guarantee it will do as well next decade.  The fact that current market conditions may be different than they were back then makes moving from historical average assumptions even riskier.

Why is Ponax Performance Worse than Other Bond Funds?  

There are three main reasons:

  1.  No Exposure to U.S. Treasury Bonds  – The only two bond funds in the chart with no exposure to Treasuries are both actively managed, and they charge higher fees for this privilege.  U.S. Treasury bonds have historically provided a less risky return than other bonds, so it’s important to understand that not all bonds are created equal.
  2. Fees – As shown in the previous section, investors pay quite a price to have someone else choose what investment to use.  According to the Fund Analyzer on Morningstar, indexing is now cheaper than ever before, but advisors still charge 1% of assets annually on average for making these choices for you.  That’s still a decent chunk of change, but the amount you pay will vary based on your personal situation.
  3. Volatility Drag – While other funds have had periods of volatility, it is important to look at the long-term picture rather than just short-term swings in performance.  Pentax’s returns are clustered around the flat after taxes for U.S. investors due to its volatile nature.  

To summarize, if market conditions continue as they have over the past ten years or even longer, then choosing an actively managed bond fund with no exposure to U.S Treasury bonds will likely cost an investor many multiples of what Ponax charges in fees every year on average

Is Ponax a good fund?  

It is a reasonable option in a diversified portfolio, but there are better choices.  For a conservative investor with a short time horizon, it might be the best choice available for that profile; one could also choose to hold only U.S. Treasury bonds or very short-term U.S. Treasuries (less than five years), which would eliminate the effects of volatility drag and greatly minimize fees.

Despite the past performance, can it still be worthwhile to invest in active bond funds?

Possibly – remember how we noted that looking at historical averages tells you nothing about future returns?  We didn’t include figures for anyone before 2003 because there wasn’t enough data to make an accurate chart:

This highlights one of the main problems with active management.  While some actively managed funds have performed better than indexing historically, they rely on a long-term track record based on historical averages to attract investors.  If you can accept the idea that past performance does not guarantee future results, then it may be possible for someone who has studied the bond market carefully and knows what’s coming next to beat indexing – but that is very rare.

The takeaway from all of this: keep an eye out for fees, diversify across more than just one fund, and don’t bet on anything without considering both sides of the coin.  

Visit Executive Surety Bonds to know more!

bookmark_borderWhy Need a Performance Bond for Gold Trade?

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Why Need a Performance Bond for Gold Trade?

The advent of the Gold Futures Contract on Comex marked the first time that traders could speculate on the price of gold without actually having to purchase physical metal. The contract was introduced in December 1974 following a study by the Commodity Futures Trading Commission (CFTC), which “concluded that trading in futures contracts for commodity options would be beneficial to both producers and consumers”. The CFTC’s conclusions were based upon findings that:

  • trading in futures markets reduces price uncertainty; 
  • increased liquidity results in more efficient execution of transactions; 
  • risk can be controlled with regulated futures exchanges; and, 
  • adequate information exists to permit trading knowledgeable investors.

Initially, the Gold Futures Contract had a 100 ounce (100 oz) contract size and was traded by individuals and firms including non-commercials. A year later the Comex broke the mold of commodity futures contracts by expanding to a five-ounce (5 oz) mini contract. Comex would continue to add new mini contracts, eventually establishing a one-tenth (1/10th) of an ounce (0.1 oz) lot size in 2003.

Why is a surety bond needed versus insurance?  

In Comex’s early years, gold futures contracts were settled “physically.” In other words, when a trade was made on paper in the form of a futures contract it had to be delivered in metal. As Comex describes: 

On most exchanges today, a sale of commodity results in both sides delivering and receiving the commodity. But not here. We settle in cash every day based on the COMEX closing price or midpoint between bid and asked prices from 10:30 A.M. [EST].

In the late 1970s, investors became concerned that their profits may not be realized due to non-delivery through failure to deliver by the buyer against whom they traded (failure by one party to deliver is referred to as “failure to deliver”). Because of these concerns, investors began demanding what are referred to as performance bonds.

Performance Bonds are surety devices used by the exchanges to protect both parties in a contract from non-delivery… The exchange acts here merely as an intermediary that guarantees payment between two unrelated persons.

What is a performance bond in international trade?  

A performance bond – referred to as a surety – requires a third-party guarantee of the transaction. In international trade, this third party is typically an insurance company that underwrites that a buyer will pay for goods or services purchased from a seller. The International Chamber of Commerce’s (ICC) publication “Performance Bonds and Guarantees” provides:

Like other forms of guarantees, performance bonds are used where one contracting party is deemed to be at risk of defaulting on its obligations. Performance bonds reduce such risks… They provide an extra degree of protection, usually at relatively little cost… A supplier facing many unknown risks may find it more economical and certainly less risky to use performance bonds rather than individual credit.

What information do I need to provide in order to get bonded? What is the process of getting bonded?  

The following information must be provided when applying for a performance bond: 

  1. The name and address of the person or company whose credit will be guaranteed; 
  2. A list of the guarantor’s references, including names and addresses; 
  3. A schedule of the commodities involved, specifying the dates deliveries are expected to be made, dates of expiration of all contracts involved, their prices and quantities, identification numbers (such as CUSIP), broker names [and] telephone [numbers]. All guarantors should have an FINCEN number. 

In other words, before becoming surety for a contract on Comex or any other future exchange in the United States a company must be in good standing with FINCEN, provide a number and contact information. This requirement has been around since 1996 when FINCEN was implemented.

This process they [Comex] go through to ensure that you are going to be able to meet the obligation of your contract… But there’s still an independent third party looking at it which is what we call the performance bond. 

Why not just use insurance companies?  

There are downsides for both insurance companies and surety providers. Insurance companies typically want high premiums for the cost of risk associated with gold futures contracts while surety companies want low premiums but take on unlimited liability. 

Additionally, insurance policies can easily be sold by one party to another, making risk assessment and management difficult. As such, there is a preference for performance bonds over insurance policies as the method of surety in the gold trade.

What determines what percentage of my contract I need to bond?  

There are no minimum or maximum amounts required by Comex to provide a performance bond (except for Spread Contracts). The larger and more important the transaction, typically the higher level of surety needed to ensure that payment will be made. 

A buyer will want greater surety because if they do not receive their gold, they cannot complete their end of the contract and would then only be able to claim against the guarantor (e.g., SURETY) who could choose not to pay. Because of this, it is not unusual for the buyer to want multiple guarantors in order to have a greater surety.

Visit Executive Surety Bonds to know more!

bookmark_borderWho Sells Performance Bonds?

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Performance Bonds are issued by who? 

Performance Bonds are issued by surety companies. 

A Bond is basically an agreement in which one party promises to pay another, usually on the fulfillment of certain conditions, such as completion of work specified in a contract or payment of taxes. 

A Performance Bond guarantees that a construction project will be completed and/or the sale will be honored according to terms of the contract for payment from a client. In general, performance bonds must be requested by the owner before work begins. However, contractors should ask about any potential projects that require a performance bond prior to bidding on them because if they

Performance Bonds serve to guarantee that work or products contracted by a governmental agency will be performed or delivered as agreed upon in the contract with the agency. For instance, construction projects may require issuing by construction contractors, while some road work contracts would call for motorists to purchase supplies from local merchants along roads where work is being done.

Are performance bonds issued by insurance companies? 

Insurance companies do not issue performance bonds. Surety companies (sometimes called “bond companies”) and insurance companies are both financial service providers, but they serve different functions. The primary difference between the two is that performance bonds protect a customer from financial loss if something goes wrong while insurance protects customers from events such as damage to property or injury due to accidents. 

Insurance will pay an agreed-upon amount of money if certain conditions occur, such as a car accident or fire — it doesn’t matter who caused the damage. Performance bonds, on the other hand, only pay when one party in a contract fails to fulfill their obligation under the bond agreement — usually because they did shoddy work and/or didn’t follow project specifications and plans, or they went out of business before the project was complete. There are several different types of performance bonds, including bid bonds, contract bonds, and maintenance bonds.

A bond is basically an agreement in which one party promises to pay another, usually on the fulfillment of certain conditions, such as completion of work specified in a contract or payment of taxes. A performance bond guarantees that a construction project will be completed and/or the sale will be honored according to the terms of a contract for payment from a client. In general, performance bonds must be requested by the owner before work begins. 

However, contractors should ask about any potential projects that require a performance bond prior to bidding on them because if they build it without first securing coverage for it with the proper type of bond, the job site becomes exposed to potential problems such as incomplete or shoddy work.

What is the purpose of a performance bond?

A Performance Bond might be required if a contractor or subcontractor needs to show that they can compensate for a failure in providing a good/service to a project owner, should the need arise. It guarantees that they will complete their responsibility under contract or refund any money owed. 

For instance, construction projects may require issuing by construction contractors, while some road work contracts would call for motorists to purchase supplies from local merchants along roads where work is being done.

Who Sells Performance Bonds?

Surety companies issue performance bonds. They are financial service providers that specialize in ensuring the honesty and integrity of contractors providing goods or services to customers by facilitating transactions between buyers, sellers, contractors, suppliers, licensors, and sub-contractors. Sureties write surety bonds only after carefully checking the credit history of their applicants. Although many surety companies process applications in a matter of minutes, they may take more time when applicants need additional investigations. By carefully reviewing the application submitted by a contractor, a surety company can make an initial determination on the creditworthiness of the applicant. In order to determine whether or not to issue a performance bond, 

The cost for this insurance depends on factors such as what kind of construction is being done and who you are contracting with. Since it’s good to have protection, however, before bids are accepted from potential contractors, or before you accept a contract for work or services from them, look at their rating. If they don’t have a rating then that should be a red flag – it implies there might be something wrong with them so why would you want to do business with them?

To find out who sells performance bonds, you need to know that there are different types of bonds, each one covering its own level of risk. There is a difference between bid and contract bonds, but both seek to ensure the good faith of your contractor.

Visit Executive Surety Bonds to know more!

bookmark_borderWhere Can You Buy a Performance Bond?

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Performance Bonds are issued by who?

Financial firms, contractors, and government entities all issue performance bonds. The surety, also known as the obligor, is the individual who issues the bond. If a contractor fails to deliver as promised, a performance bond ensures that the principal (the person receiving the services) will not incur any out-of-pocket expenses. Bonds may be required for a variety of reasons, including:

Contracting parties regularly demand this form of assurance from the parties with whom they do business, usually as a result of some misdeed in which one party fails to meet its contractual obligations. This arrangement, also known as an “indemnity bond,” compels a party who has engaged in a contractual connection with another party and is financially responsible for project problems to compensate the other party for any damages suffered.

A performance bond is an agreement in which a third party promises that a person who has entered into an agreement with another will perform as promised and undertakes to cover any costs incurred as a result of that person’s failure to do so. A bank or an insurance firm can issue the bond itself.

Subcontractors frequently demand performance bonds in construction projects because they may not have sufficient financial resources to complete the project if their employer defaults. Performance bonds provide contractors with good faith assurance from those with whom they contract, as well as protection from litigation brought by owners or prime contractors demanding damages as a result of the contractor’s default.

Are performance bonds issued by insurance companies?

Yes, performance bonds are issued by insurance firms. They are known as surety bonds, and they guarantee that a contractor will execute according to the terms of their contract with another party. Performance bonds are intended to protect a principal who enters into a contract with another party if the other party fails to deliver as promised.

In the event of nonperformance by a subcontractor or supplier, the burden of meeting contractual obligations is shifted from those who fail to meet their responsibilities to those who have vowed to deliver on their promises.

Some contractors may request a performance bond from a subcontractor, but only if they are concerned about the subcontractor’s capacity to meet its contractual obligations due to insufficient assets or financial stability. When a client requests it, insurance companies may be obligated to produce proof of financial stability. If a contractor fails, an insurance company will pay any claims made against them, even if it means using money that is not part of the company’s normal operating budget.

Contractors and subcontractors may be required to provide performance bonds to safeguard each other’s interests and ensure that contractual obligations are met. The bond also protects subcontractors and suppliers who may not have the resources or assets of their own to utilize as collateral for restitution if the contractor fails to meet its obligations under the contract. Businesses might require performance bonds from contractors as a condition of doing business with them when they sign agreements with them.

Is it true that banks offer performance bonds?

Banks do, in fact, issue performance bonds. Banks provide financial instruments that guarantee a contractor will fulfill their contractual duties and will pay any damages or legal costs incurred as a result of failure to do so. The bond is issued by a bank and serves as a type of insurance for both parties in the event that one of them fails to fulfill their contractual obligations.

Insurance firms also give these types of guarantees on behalf of contractors who may not have sufficient resources or assets to make restitution if they fail to meet their contractual obligations. Performance bonds serve as good-faith security that protects both parties’ interests in circumstances when there is some dispute about whether a subcontractor has sufficient finances or assets to use for restitution.

What is the cost of a performance bond?

The price of a performance bond is determined in part by the nature and value of the contract. The higher the stakes, the more expensive it will be for one side to ensure that the other will keep their end of the bargain. A $10 million contract, for example, would necessitate a significantly higher performance bond than a $1 million contract, and because the amount is so large, it may be impossible to secure from some banks or insurance firms.

Banks may also demand proof of financial stability from individuals seeking performance bonds in order to prevent having to pay out on claims stemming from contractor default if the contractor lacks assets with which to make restitution. Banks and insurance companies charge fees based on a percentage of the bond’s total value or a flat fee for issuing the bond.

A contractor requesting a $1 million performance bond may pay between 1% and 3% of the total contract value in insurance premiums, while if more than one subcontractor is covered under the same agreement, the bank or insurer may be able to negotiate a group discount.

Visit Executive Surety Bonds to know more!

bookmark_borderWho Covers the Cost of a Performance Bond?

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In international commodity trading, who pays for the performance bond?

The importer – and importers – are the ones who do it. Unfortunately, many import buyers believe the seller is responsible for the bond. That’s why some industry insiders estimate that as much as $1 billion (US) in commodities is left on the table each year because buyers refuse to ship on an open account basis without a performance bond.

The term “open account” refers to the buyer having complete ownership over the products until they are paid for. Without any assurance that he will be paid, the vendor ships and delivers to a carrier’s pier or warehouse. Payment by letter-of-credit (L/C) is normally made after the bank receives the necessary paperwork. As part of an international trade transaction, no paperwork or pre-shipment inspection (PSI) are necessary with open account trading.

The importer pays via L/C at his or her own bank, which then provides a post-shipment draft (or “nostro” transfer). But who pays if there is no purchase order requiring a performance bond?

The sole party at risk in the event of a non-performance of an import contract is the importer. If the seller does not have sufficient funds to back up his sales agreement, the importer will be out of pocket until it can pursue legal action against the seller to recoup its losses.

Who pays for the commodity performance bond?

To clarify, the importer has the option of selecting a performance bond for a specified amount or percentage of the contract price. In most circumstances, it amounts to 5% of the overall cost of the products purchased.

Payment by L/C alone may be prohibited in several countries, particularly those in Latin America and Russia. Even in countries where it is legal, such as China, some banks forbid their customers from paying in advance without a performance bond. 

The customer has no choice but to pay by L/C with a bank guarantee in such instances. Even though they are fundamentally distinct sorts of transactions, the importer pays for the performance bond on both open account and letter-of-credit transactions.

What is the cost of a performance bond?

The importer is at risk of failing to deliver. In an open account transaction, the buyer pays for the items with cash and provides the seller with a Bid bond. You can utilize bid bonds or bid guarantees (deposits) instead of the performance bond that most trading partners need, which lowers the amount of capital required by buyers and sellers for commodities transactions.

Before placing a bid, consult your freight forwarder and attorney to ensure that you are completely aware of any hazards involved. It’s also crucial to remember that even if you buy or sell in part under open account conditions, you’ll still need a performance bond and other types of risk protection, such as physical loss and damage insurance.

Who is responsible for paying the construction payment performance bond?

A bid bond or performance bond, which has been known as “surety bonds” for many years, is a common condition in construction contracts.

Most suppliers in the construction industry require a bid bond from customers who request bids on an open account basis with no performance bond upfront in order to achieve a sales agreement. Typically, the client is asked to give a bid guarantee of 5% of the entire value of the products requested.

Performance bonds are usually paid by the project owner or general contractor. The architect/engineer, on the other hand, may need one from a subcontractor to ensure that it has the cash to complete the work in the event that its customer fails to pay.

Who is responsible for the payment performance bond?

A buyer who has agreed to acquire products, real estate, or services puts up his or her own money as collateral. A bid bond or bid guarantee (deposit) may also be demanded of the buyer, which is a quantity of money that signifies a promise to pay by the bidder issuing it if that firm isn’t granted the work.

A bid bond ensures that if a bidder wins the bidding procedure, they will have funds available. In this situation, your contractor would most likely want you to sign as a co-obligor on the bid with him so that he can involve his surety firm in his bid submission via a Bid Bond kind of performance bond.

What is a payment bond, and who is responsible for paying it?

The most frequent type of surety bond required by contractors bidding on public works projects such as road work or building construction is a payment bond (also known as a contractor’s license and permission bond). It ensures that they will pay subcontractors, workers, and suppliers for labor and materials used to accomplish their project in accordance with the contract terms.

Your contractor will most likely want you to sign as a co-obligor on his bid so that he can involve his surety firm in his bid submission via a Bid Bond kind of performance bond.

Visit Executive Surety Bonds to know more!

bookmark_borderPonax Performance vs Other Bond Funds: Which is Better?

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What is Ponax Performance, and how does it work?

Ponax is a bond fund that invests in high-quality, short-term bonds with a credit risk component. Currently, 70% of the portfolio is AAA and AA rated. The fund’s track record can be found on my blog here. Ponax representatives claim that the bond funds are “tax optimized,” however this does not appear to be the case at first inspection. On an annual basis, all of their returns are taxable, therefore they pale in contrast to ETFs in terms of after-tax returns over time.

Ponax Performance is a hypothetical financial model that attempts to depict the performance of a common bond fund. The goal of this exercise is to compare its performance to that of other funds in the Market Vectors Intermediate Government/Credit Bond ETF (NYSEARCA: ICGB), which attempts to track the performance of a single representative benchmark index, the Market Vectors US Intermediate Government/Credit Bond Index, under a variety of market conditions.

Unless otherwise noted, all references to dollars are assumed to be in US dollars (USD).

What is a Ponax Performance for?

The goal is to accomplish three things:

  • To highlight how costly purchasing financial services can be for individual investors;
  • To give real-world examples of how different decisions affect investing; and
  • To use mathematics to make the world a better place.

What factors go into determining Ponax Performance?

It is based on monthly total returns of ICGB and SPY (the S&P 500 ETF), and it covers the period from January 1, 2005, to December 31, 2014:

This graph can be interpreted in two ways:

  • To begin, you could argue that, except U.S. Treasury bonds, which aren’t included in either portfolio, other bond funds have been flat at best over the last decade, but that the typical investor has lost far more than their fees due to volatility drag. The impact of losses generated by price swings is referred to as “volatility drag,” and it is the nemesis of individual investors. The orange line (Ponax) has been rising at a rate that would have made an investor dissatisfied if he or she had stayed in the fund over time, as you can see.
  • The chart can also be interpreted as a caution not to bet on any investment for the next 10 years based solely on its past performance because there’s no assurance it will perform as well next decade. Because present market conditions may differ from those of the past, relying on historical average assumptions is especially hazardous.

Why is Ponax’s performance so poor in comparison to other bond funds?

There are three major causes for this:

  1. No exposure to Treasury Bonds in the United States – The chart’s only two bond funds with no Treasuries exposure are both actively managed, and they charge higher fees as a result. Because US Treasury bonds have historically offered a lower risk-return than other bonds, it’s vital to remember that not all bonds are created equal.
  2. Fees – As previously stated, investors pay a high premium to have someone else determine which investment to use. Indexing is now cheaper than ever before, according to Morningstar’s Fund Analyzer, yet advisors still charge 1 percent of assets yearly on average to make these decisions for you. That’s still a significant sum of money, but the amount you pay will depend on your specific circumstances.
  3. While other funds have had times of volatility, it is vital to consider the long term picture rather than just short-term performance fluctuations. Ponax’s returns for U.S. investors are mostly flat after taxes due to its volatile nature.

To recap, if market conditions remain the same as they have been for the previous 10 years or longer, an actively managed bond fund with no exposure to US Treasury bonds will likely cost an investor many times what Ponax charges in annual fees.

Is Ponax a wise investment?

It’s a good pick for a diversified portfolio, but there are better alternatives. It may be the greatest option for a conservative investor with a short time horizon; alternatively, one may own exclusively U.S. Treasury bonds or extremely short-term U.S. Treasuries (less than five years), which would eliminate the impacts of volatility drag and considerably reduce expenses.

Is it still worthwhile to invest in active bond funds despite prior performance?

Perhaps – remember how we said that looking at historical averages doesn’t predict future results? Because there wasn’t enough data to construct an accurate graphic before 2003, we didn’t include stats for anyone before that year:

This elucidates one of the most serious issues with active management. While some actively managed funds have outperformed indexing in the past, they attract investors by relying on a long-term track record based on historical averages. If you accept the premise that previous performance does not guarantee future results, then someone who has carefully studied the bond market and understands what’s coming next might be able to outperform indexing – but this is extremely rare.

The upshot from all of this is to watch out for fees, diversify your investments across multiple funds, and never bet on something without evaluating all sides of the equation.

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bookmark_borderWhy Do Gold Traders Require a Performance Bond?

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Why Do Gold Traders Require a Performance Bond?

The introduction of the Comex Gold Futures Contract was the first time that traders could speculate on the price of gold without needing to buy the physical metal. Following a study by the Commodity Futures Trading Commission (CFTC), which “concluded that trading in futures contracts for commodity options would be beneficial to both producers and consumers,” the contract was established in December 1974. The CFTC’s conclusions were based on the following findings:

  • Price unpredictability is reduced by trading in futures markets.
  • Increased liquidity leads to more efficient transaction execution.
  • Risk can be managed by the use of regulated futures exchanges; and
  • There is enough information available to allow educated traders to engage in trading.

Individuals and organizations, including non-commercials, traded the Gold Futures Contract at first, which had a contract size of 100 ounces (100 oz). The Comex then expanded to a five-ounce (5 oz) micro contract a year later, breaking the model of commodities futures contracts. Comex would continue to add additional tiny contracts until 2003 when it established a one-tenth (1/10th) of an ounce (0.1 oz) lot size.

When compared to insurance, why is a surety bond required?

Gold futures contracts were settled “physically” in Comex’s early years. To put it another way, a paper trade in the form of a futures contract had to be delivered in metal. As Comex puts it:

A sale of a commodity nowadays on most exchanges results in both parties providing and receiving the commodity. But not in this case… Every day at 10:30 a.m. [EST], we settle in cash based on the COMEX closing price or the midpoint between bid and asked prices.

Investors became apprehensive in the late 1970s that their profits might not be realized due to non-delivery by the buyer against whom they traded (failure by one party to deliver is referred to as “failure to deliver”). As a result of these worries, investors began to demand so-called performance bonds.

Exchanges utilize performance bonds as surety mechanisms to safeguard both parties in a contract against non-delivery… In this case, the exchange just serves as a mediator, ensuring payment between two unconnected parties.

In international trade, what is a performance bond?

A surety bond, also known as a performance bond, requires a third-party assurance of the transaction. This third party in international trade is usually an insurance business that guarantees that a buyer will pay for products or services purchased from a seller. The publication “Performance Bonds and Guarantees” by the International Chamber of Commerce (ICC) contains the following information:

  • Performance bonds, like other types of guarantees, are utilized when one of the contracting parties is regarded to be at risk of defaulting on its obligations. 
  • Such risks are mitigated by performance bonds.
  • They offer an extra layer of protection for a relatively low price.
  • Performance bonds, rather than individual letters of credit, maybe more cost-effective and certainly less risky for a provider facing multiple unknown hazards.

 

In order to be bonded, what information do I need to provide? What is the bonding procedure like?

When applying for a performance bond, you must supply the following information:

  • Name and address of the individual or business whose credit will be insured;
  • a list of references for the guarantor, containing names and addresses;
  • A schedule of the commodities involved, detailing the projected delivery dates, the expiration dates of all contracts, their prices and quantities, identification numbers (such as CUSIP), broker names, and telephone [numbers]. A FinCEN number should be obtained by all guarantors.

To put it another way, a corporation must be in good standing with FINCEN and provide a phone number and contact information before becoming a surety for a contract on Comex or any other futures market in the United States. This rule has been in place since the creation of FINCEN in 1996.

This technique is used by [Comex] to ensure that you will be able to fulfill your contract’s obligations. However, the performance bond, which is an independent third party, is still looking at it.

Why not utilize insurance firms instead?

Both insurance firms and surety suppliers have disadvantages. For the expense of risk connected with gold futures contracts, insurance firms often want high premiums, whereas surety businesses want modest rates but take on unlimited responsibility.

Furthermore, insurance contracts are easily sold from one party to another, making risk assessment and management challenges. As a result, performance bonds are preferred over insurance policies as a source of guarantee in the gold trade.

What factors decide how much of my contract must be bonded?

Comex does not specify a minimum or maximum value for a performance bond (except for Spread Contracts). The higher the level of guarantee required to assure that payment is made, the larger and more essential the transaction.

A buyer will demand more surety because if they do not receive their gold, they will be unable to fulfill their obligations under the contract and will have no recourse but to sue the guarantor (e.g., SURETY), who may choose not to pay. As a result, it is not uncommon for the buyer to request any guarantors in order to ensure greater certainty.

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bookmark_borderWho Sells Performance Bonds and How Much Do They Cost?

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Who is the issuer of Performance Bonds?

Surety businesses are the ones who issue performance bonds.

A bond is essentially an agreement in which one party promises to pay another if specific conditions are met, such as the execution of work specified in a contract or the payment of taxes.

A Performance Bond ensures that a construction project will be finished and/or a sale will be honored in accordance with the terms of the contract in exchange for payment from the client. In most cases, the owner must request performance bonds before work can commence. Contractors should, however, inquire about any potential projects that demand a performance bond before bidding on them.

Performance Bonds provide that work or products contracted by a government agency will be completed or delivered according to the terms of the contract. Construction projects, for example, may require permits from contractors, whereas other road work contracts may require motorists to purchase supplies from local shops along the roads where work is being done.

Is it true that insurance companies offer performance bonds?

Performance bonds are not issued by insurance firms. Insurance businesses and surety firms (sometimes known as “bond companies”) are both financial service providers, however, they serve different purposes. The main distinction between the two is that performance bonds protect customers from financial loss if something goes wrong, whereas insurance protects consumers from events such as property damage or personal harm caused by accidents.

If specific events occur, such as a vehicle accident or a fire, insurance will pay a predetermined amount of money, regardless of who caused the harm. Performance bonds, on the other hand, only pay when one party in a contract fails to meet their obligations under the bond agreement – frequently because they conducted sloppy work and/or failed to follow project specifications and plans, or because they went out of business before the project was completed. Performance bonds come in a variety of forms, including bid bonds, contract bonds, and maintenance bonds.

A bond is essentially an agreement in which one party promises to pay another if specific conditions are met, such as the execution of work specified in a contract or the payment of taxes. A performance bond ensures that a construction project will be finished and/or that a sale will be carried out in accordance with the terms of the contract in exchange for payment from a client. In most cases, the owner must request performance bonds before work can commence.

Contractors should, however, inquire about any potential projects that require a performance bond before bidding on them, because if they build it without first securing coverage for it with the appropriate type of bond, the job site becomes vulnerable to issues like unfinished or substandard work.

What is a performance bond’s purpose?

If a contractor or subcontractor needs to show that they can compensate for a failure to provide a good or service to a project owner, a Performance Bond may be required. It ensures that they will fulfill their contractual obligations or return any money owing.

Construction projects, for example, may require permits from contractors, whereas other road work contracts may require motorists to purchase supplies from local shops along the roads where work is being done.

Who Sells Performance Bonds and How Much Do They Cost?

Performance bonds are issued by surety firms (sometimes known as “bond companies” or simply “surety”). They’re financial service providers who specialize in assuring the honesty and integrity of contractors who offer goods or services to clients by arranging transactions between buyers, sellers, contractors, suppliers, licensors, and sub-contractors. Sureties only write surety bonds after thoroughly investigating their applicants’ credit histories. 

Although many surety businesses process applications in a couple of minutes, when applicants require additional investigations, it may take longer. A surety firm can make an initial assessment of the creditworthiness of an applicant by carefully analyzing the application supplied by the contractor. When deciding whether or not to issue a performance bond, consider the following factors.

The cost of this insurance is determined by criteria such as the type of construction being done and the contractor with whom you are working. However, because it’s always good to be safe, check out potential contractors’ ratings before accepting their bids or signing a contract with them for work or services. If they don’t have a rating, it should be a red indicator; it implies that they may have a flaw, so why would you want to do business with them?

To find out who sells performance bonds, you must first understand the many types of bonds available, each of which covers a different amount of risk. There is a distinction between bid and contract bonds, but both strive to secure your contractor’s good faith.

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