CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based
A contractor gives the government a bank guarantee in place of a cash security deposit for a road project. Which type of bank guarantee is this, and what is its main purpose?
It is a performance guarantee. The bank undertakes to compensate the government if the contractor fails to execute the road project as per the contract, so it works as an assurance of performance in place of a cash deposit.
- AFinancial guarantee, to repay a borrowing
- BPerformance guarantee, to assure the contract will be executed as agreedCorrect
- CDeferred payment guarantee, to allow instalments on machinery
- DAdvance payment guarantee, to protect the contractor's advance
Explanation
A guarantee given in lieu of security deposit to assure proper execution of a contract is a performance guarantee. If the contractor fails to perform, the beneficiary can claim. An advance payment guarantee protects the buyer who has paid an advance, not the contractor.
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