There are several types of business insurance that protect the business from a variety of risks, including property damage, lawsuit payouts, and lost income. Small business owners who are just getting started should discuss their insurance needs with a qualified insurance advisor before they start providing services to customers.
Bonding: While insurance offers protection for the company, bonding offers protection to a business's customer. If something goes wrong, the customer can file a claim against the company, and the bond purchased by the company will cover the cost of the claim, provided it is deemed to be valid.
In its simplest terms, bonds are meant to protect consumers from harmful, unethical, or otherwise poor business practices. There are two different kinds of bonds a business owner can purchase: fidelity bonds and surety bonds. A fidelity bond can be considered a supplement to business insurance because it provides protection for both the customer and the business from theft, misconduct, or fraud on the part of the company's employees.
If a company's employee is performing a service in a customer's home and steals something, a fidelity bond can be used to cover the cost of the employee's misconduct and the company is not held directly liable for the damages caused by the employee.
So while a fidelity bond is primarily protection for the customer, it also protects the business from errant behavior on the part of its employees. A surety bond, which can also be called a performance bond, provides the customer with a guaranteed assurance that the services will be provided as agreed. There are three parties involved in the purchase of surety bonds:. Here is an example of how bonding works in the case of a surety bond: Let's say a construction company purchases a bond either because it is required by the state the business is operating in or as a guarantee of the quality of work they will perform for customers.
The company is hired to build a deck for a customer, and during the course of the project, the company damages part of the siding on the customer's home. The customer asks the company to repair the siding, but the company can't or won't fix the damage.
The customer can file a claim with the surety company, and if the claim is found to be valid after an investigation, the customer will be repaid from the bond the company purchased.
The customer can then use the money paid through the bond to hire another company to fix the damage. Bankrate follows a strict editorial policy , so you can trust that our content is honest and accurate.
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The information on this site does not modify any insurance policy terms in any way. Being bonded means that a bonding company has secured money that is available to the consumer in the event they file a claim against the company.
The secured money is in the control of the state, a bond, and not under the control of the company. Well, you would file a claim against the company and, after an investigation, would be paid out by this bond. This is slightly different but similar to what it means for an employee to be bonded. In general, this is generally done when an employee has to handle large amounts of money or handle valuable property like jewelry or art.
If you do, then the bonding company pays out the amount of the theft. By being bonded, it shows that the employee is trustworthy enough for a bonding company to insure you up to a certain amount.
Now, a company that is bonded means that a bonding company has funds. For example, home improvement contractors will have to be licensed to perform certain types of work and that license number will be printed on every advertisement they print. You can take that license number and look up their performance history in most states through the Better Business Bureau. This is probably the most commonly understood of the three second to being licensed and this refers to what happens if someone gets hurt on the job.
Once you know that they are, research and confirm that they are being truthful. But there is a logic to how bonds are valued. Up to this point, we've talked about bonds as if every investor holds them to maturity. It's true that if you do this you're guaranteed to get your principal back plus interest; however, a bond does not have to be held to maturity. At any time, a bondholder can sell their bonds in the open market, where the price can fluctuate, sometimes dramatically.
The price of a bond changes in response to changes in interest rates in the economy. This difference makes the corporate bond much more attractive. When interest rates go up, bond prices fall in order to have the effect of equalizing the interest rate on the bond with prevailing rates, and vice versa. Another way of illustrating this concept is to consider what the yield on our bond would be given a price change, instead of given an interest rate change.
YTM is the total return anticipated on a bond if the bond is held until the end of its lifetime. Yield to maturity is considered a long-term bond yield but is expressed as an annual rate. In other words, it is the internal rate of return of an investment in a bond if the investor holds the bond until maturity and if all payments are made as scheduled.
YTM is a complex calculation but is quite useful as a concept evaluating the attractiveness of one bond relative to other bonds of different coupons and maturity in the market. The formula for YTM involves solving for the interest rate in the following equation, which is no easy task, and therefore most bond investors interested in YTM will use a computer:.
We can also measure the anticipated changes in bond prices given a change in interest rates with a measure known as the duration of a bond. Duration is expressed in units of the number of years since it originally referred to zero-coupon bonds , whose duration is its maturity.
We call this second, more practical definition the modified duration of a bond. The duration can be calculated to determine the price sensitivity to interest rate changes of a single bond, or for a portfolio of many bonds.
In general, bonds with long maturities, and also bonds with low coupons have the greatest sensitivity to interest rate changes. A bond represents a promise by a borrower to pay a lender their principal and usually interest on a loan. Bonds are issued by governments, municipalities, and corporations. The interest rate coupon rate , principal amount, and maturities will vary from one bond to the next in order to meet the goals of the bond issuer borrower and the bond buyer lender.
Most bonds issued by companies include options that can increase or decrease their value and can make comparisons difficult for non-professionals. Bonds can be bought or sold before they mature, and many are publicly listed and can be traded with a broker. While governments issue many bonds, corporate bonds can be purchased from brokerages. If you're interested in this investment, you'll need to pick a broker. You can take a look at Investopedia's list of the best online stock brokers to get an idea of which brokers best fit your needs.
Because fixed-rate coupon bonds will pay the same percentage of their face value over time, the market price of the bond will fluctuate as that coupon becomes more or less attractive compared to the prevailing interest rates. As long as nothing else changes in the interest rate environment, the price of the bond should remain at its par value. Investors who want a higher coupon rate will have to pay extra for the bond in order to entice the original owner to sell. Bonds are a type of security sold by governments and corporations, as a way of raising money from investors.
The bond market tends to move inversely with interest rates because bonds will trade at a discount when interest rates are rising and at a premium when interest rates are falling. To illustrate, consider the case of XYZ Corporation. The example above is for a typical bond, but there are many special types of bonds available.
For example, zero-coupon bonds do not pay interest payments during the term of the bond. Instead, their par value—the amount they pay back to the investor at the end of the term—is greater than the amount paid by the investor when they purchased the bond. Convertible bonds, on the other hand, give the bondholder the right to exchange their bond for shares of the issuing company, if certain targets are reached.
Many other types of bonds exist, offering features related to tax planning, inflation hedging, and others. Fixed Income Essentials. Corporate Bonds. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
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