How Do Surety Bonds Work?

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A surety bond has a minimum of three people involved, with one being the principal, another being the obligee and a third being the surety. Find out how someone makes a promise that someone else will fulfill an obligation with a surety bond with help from a licensed financial planner in this free video on bonds and investing.

Part of the Video Series: Bond Investing
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Video Transcript

My name is Bill Rae. I'm with Alumni Financial Services. I've been in the business of the finance world for well over 20 years. Your question is, how do surety bonds work? That's a great question. First of all, let me start this off by telling you we're not giving stock or bond purchasing advice. You need to talk with a licensed professional if you're actually going to invest in these things. But, let's understand what a surety bond is. First of all, a surety bond has a minimum of three people involved. One is the principal, the other is the obligee and the other is the surety. Probably the best example and the easiest to understand this is to think about the American court system. We commonly call them bails bondsmen. You get in trouble, you're in front of a judge and he says you have to post a bond. Let's say for example your bond is 5,000 dollars. You call the bails bondsman and say help, get me out. The bails bondsman puts up money, generally about 10% and he says to the court he'll make sure that you show up to answer your day in court. Now if you take off, the bails bondsman is liable for that 5,000 dollar bond which is why the bails bondsman if you skip searches you down, breaks your leg and drags you back to court. That's a very simple idea of what a surety bond is but I hope you get the idea. It requires three parties, one makes a promise to make sure someone else fulfills the obligation. And the third party waits till it all comes together if you will. But as in everything in finance, you really need to understand whatever agreement or contracts you're getting involved in, you need to understand what's required of you, when and how you get your money back and how or what reasonable returns you should expect on your money. The bails bondsman makes his and you should yours. But always seek competent advice. My name is Bill Rae, I'm with Alumni Financial Services and we're always here to help you build wealth.

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