Context:
Surety Insurance Bonds market – an alternative to bank guarantees in infrastructure projects — has failed to take off in the last three years due to technical and financial impediments.
About Surety Bonds:
- A surety bond is a promise to be liable for the debt, default, or failure of another.
- It is a unique type of insurance because it involves a 3-party agreement.
- 3 parties –
- Principal – The party that purchases the bond and undertakes an obligation to perform an act as promised.
- Surety – The insurance company or surety company that guarantees the obligation will be performed. If the principal fails to perform the act as promised, the surety is contractually liable for losses sustained.
- Obligee – The party who requires, and often receives the benefit of the surety bond. For most surety bonds, the obligee is a local, state or federal government organization.
- It is provided by the insurance company on behalf of the contractor to the entity that is awarding the project.
- It will help contractors to have financial closure of their projects without depending upon only bank guarantees.
- 2 broad categories – Contract surety bonds and Commercial (also called miscellaneous) surety bonds.
Source: Indian Express
Previous Year Question
Consider the following markets:
1. Government Bond Market
2. Call Money Market
3. Treasury Bill Market
4. Stock Market
How many of the above are included in capital markets?
[UPSC Civil Services Exam – 2023 Prelims]
(a) Only one
(b) Only two
(c) Only three
(d) All four
Answer: (b)
Explanation:
Treasury bills, or T-bills, are short-term debt instruments issued by a government. These are generally issued with a maturity of less than one year. Thus, they fall into the category of the money market, not the capital market.
The call money market deals with very short-term funds. Call money is a method by which banks lend to each other to meet their short-term goals. The loans are usually overnight or for a few days at most, which makes it a part of the money market, not the capital market.
