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A surety bond is a guarantee that an obligation will be met. The guarantee or bond is a written contract between three parties. Two of the parties pledge to meet an obligation to the third party. If the obligation is not met, a sum of money is paid to the third party as damages. The amount paid is up to but does not exceed the amount of the guarantee (bond). Surety bonds reduce the risk associated with proceedings and transactions.
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What types of obligations are involved in surety bonds?
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The types of obligations that may be involve a surety bond are a contractual commitment, the payment of a debt or the performance of certain duties.
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What three parties are involved in a surety bonds?
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The three parties involved in a surety bond are a principal, an obligee and a guarantor or surety.
The principal is the party agreeing to fulfill the obligation. The obligation is the subject of the bond.
The obligee is the party for whose benefit the obligation will be performed. Therefore the surety bond exists for the benefit (peace of mind) of the obligee. If the principal defaults on the obligation guaranteed by the surety bond, the damages outlined in the bond are paid to the obligee.
The guarantor or surety is the party who issues the bond. The surety guarantees fulfillment of the obligation and agrees to pay the damages in the event of a default by the principal.
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Is a consideration given by the principal to the surety for the bond?
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Yes. The principal pays the surety for the bond. The amount paid is called a premium.
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What types of bonds guarantee the performance of written contracts?
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Contract bonds guarantee the performance of the terms and conditions of a contract. Types of contract bonds include bid bonds, payment and performance bonds, completion bonds and supply bonds.
Bid bonds guarantee the signing and acceptance of a contract, if the contract is awarded to the principal. Bid bonds also guarantee the issuance of a performance bond if the contract is awarded to the principal.
Performance bonds guarantee that the principal will complete the drawn contract. Payment bonds guarantee completion of the obligation, free and clear of liens and encumbrances. Payment bonds are also called labor and materials bonds.
Completion bonds are used when money is borrowed to fund the completion of an obligation. A completion bond is a guarantee to the lender that the money borrowed by the principal will be used to complete the obligation, free and clear of liens and encumbrances.
Supply bonds guarantee that suppliers of materials needed to perform an obligation will provide the materials.
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