What is a Bond | definition, function and examples

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What is a Bond | definition, function and examples

What is a bond and how does it work? This is such a broad topic that more blog articles are needed, so we will deepen into it progressively. In this article, we will share the definition, function and some bond examples to understand what it applies to.

The word “Afianzar” (Strengthen or Secure) comes from the Latin “fidere” which means to believe, to have faith, to trust. In the past (and even now), the verb to secure refers to ensuring or guaranteeing that two or more objects remain firm and secure, for example: with its supports or strings. Therefore, when we speak of securing we refer to the action of being firm, supporting or sustaining something. For the purposes of this article, Securing is the fact of carrying out a contract through a bond. With a bond it is a guarantee that the assumed obligations will be fulfilled.

What is a Bond?

Although a bond has evolved over time, its objective has been the same from the beginning: to guarantee the fulfillment of a duty contracted.

The definition of a bond based on the article 2794 of the Federal Civil Code is as follows:
“The bond is a contract by which a person committed with the creditor to pay for the debtor, if he does not.”

To better understand what a bond is, some sources cite the following synonyms:

  • endorsement/guarantor
  • deposit;
  • guarantee;
  • To Pawn/Token;
  • mortgage.

As seen, a bond is an instrument that serves as an endorsement or support in case a contract is breached. In case of default, the surety bond will replace the contracting party to comply with the obligation contracted.

Examples of Bonds

To better understand what is a bond, we share the following examples:

  • A person who rents its’ property, he/she will ask the interested tenant for a (renters contract) bond. This will guarantee that in case the tenant does not pay, the surety bond will make the monthly payment (renters bond).
  • A contractor is required to obtain a bond, which guarantee the quality and advancement of the work to begin. This way, the owner of the work will be secured in case of a non-compliance, and so will be able to collect the (contract) deposit and be compensated for the invested capital (compliance bond).
  • A company owner contracts a bond to cover the damages to his company, in case any of its employees may cause. This may be regarding theft, fraud, abuse of trust, cyber crimes, falsification of documents among others, etc. (fidelity bond).

What is the purpose of a bond?

When a person seeks a bond from someone else, they want to make sure that the sign agreement/contract will be fulfilled. The bond serves to guarantee to the beneficiary that the creditor will comply with the obligation acquired.

Elements that will intervene in contracting a bond:

  • Beneficiary of the bond – physical or moral person – to whom the bond is granted.
  • Creditor, is the physical or moral person in whose name the bond is issued.
  • Sole Guarantor (endorsement), is the physical or moral person who collaterally undertakes the fulfillment obligation contracted by the creditor to the surety company, if the creditor fails to comply.
  • Surety Company, is the moral person legally authorized to grant/issue a bond.

In conclusion, the objective of a bond is to guarantee the fulfillment of an obligation.

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