7 Types of Bonds You Should Know About
Bonds commonly represent an investment that returns interest income to the investor, but there are many other types of bonds. These bonds pertain to business operations, while functioning a little like insurance. Common bond types, include:
A fidelity bond is a bond that is purchased by employers to protect them against theft, embezzlement or a dishonest act by their employees. These bonds provide protection insurance that is not ordinarily covered by a company’s standard insurance coverage. Fidelity bonds can be customized according to what a company needs. This type of bond can provide blanket coverage for all of the actions of all employees and it can be designed to cover one or more specific employees. Fidelity bonds are almost the same as surety bonds, because 3 parties are involved.
The difference is that the contractual obligations only exist between the employer (the principal) and the insurance company, while the insurance company pays the employer for loss or damage caused by its employees. All forms of financial institutions, like banks are high users of fidelity bonds, sometimes called “institution bonds,” because they require many employees to handle money and many other types of valuable assets. There are other types of fidelity bonds: blanket coverage and scheduled fidelity bonds. A blanket coverage fidelity bond covers any employee working for the employer and a scheduled fidelity bond only covers specifically named persons or positions within the company.
Surety bonds are legal contracts involving three parties – the “principal” or the party required to perform; the “obligee” which is the party for whom the work is being done; and the “suret” who insures the action or duties of the principal. If the principal does not perform a duty outlined under the surety bond, then the surety pays the bond amount to the obligee, for damages, wasted time, or other issues associated with an agreed upon performance. Surety bonds can be designed with a description of the type of work that must be performed, the date which the work or project must be completed, and an amount to be paid if the obligation fails. There are different types of surety bonds, such as:
Contract bonds: Contract bonds guarantee that the principal will perform everything that is required of a contract. Different types of contract bonds guarantee different phases of the contract.
- Bid bonds guarantee that the winning bidder will actually sign a contract and purchase a performance bond.
- A Performance bond, guarantees that the principal will perform the contract or the surety will hire and pay for another contractor to finish the work. Performance bonds can also include a 1 year maintenance bond.
- A Payment bond guarantees that all subcontractors and other workers are paid, and a maintenance bond guarantees the workmanship of the principal.
- License and permit bonds: These bonds are used by businesses that need a license or a permit to work within a specific governmental location. The bonds guarantee that the laws that the principal will comply with, are the laws applicable in their line of work. For instance, a license and permit bond can guarantee that a carpenter, plumber, or electrician who has required permits, must performs the work according to the local building code.
- Federal surety bonds: This is an additional bond type that includes bonds which are regulated by the federal government and will need a “federal surety” bond. Federal surety bonds guarantees that the principal will comply with the government’s rules, regulations, and pays their specified taxes.
- Public official bond: These bonds are required by state law for elected or appointed public officials who have access to public funds and which guarantees that the public official will not embezzle the funds.
- Judicial bonds: Judicial bonds are commonly required by the court, for litigants who are appointed to perform certain duties. These bonds include fiduciary bonds, which are just as they sound, the bonds pays if money is stolen or mishandled. Court bonds or attachment bonds protects a defendant whose property has been attached and a bail bond pays the court if the defendant does not appear for their court appearance. There is another type of surety bond that are referred to as “miscellaneous” surety bonds. Miscellaneous bonds insures businesses against theft or loss by the principal.
Depending on the state or local government, the amount of a bond is set by that governing law. There are different factors that impact the cost of surety bonds and fidelity bonds. These factors include the amount of coverage needed and the company that issues the bond. A fidelity bond cost can be about .5% to 1% of the coverage. A surety bond costs between 1 and 5%t of the bond amount for any given applicant with good financial credentials.
“Trading securities” are a special class of investments, like stocks and bonds. When a company acquires any stocks or bonds, they must specify their value for accounting and tax purposes. Trading securities are more commonly used by financial institutions who create profits by buying and selling, rather than holding the security for any length of time. Traditionally trading securities are held for short periods of time, like only hours or days, depending on the security and the market. Trading is generally done through a stock exchange model, which serves as the intermediary between a buyer and a seller.
Trading securities must be recorded in a company’s balance sheet of the investor at their fair value according to the balance sheet date and it is recorded as a current asset. If there is a fluctuating change in the fair market value, then this is recorded as a gain or a loss. Simply put, trading securities are investments made with the intent of reselling them in the near future. This type of investment is considered highly liquid. They are carried at fair market value, and the changes in value are measured and included in the operating income of each period. However, other investments are acquired with the intent of holding them for an extended period. The accounting depends on the intent of the investment. Not all investments are in stock, sometimes a company may invest in a bond.