Demand Guarantees & Standby Letters of Credit

A demand guarantee is issued by a bank, under the instructions of an applicant, and promises to make a payment to a beneficiary if the principal defaults. Payment is made once a demand for payment has been received. We explore demand guarantees and in particular their benefits and drawbacks. Bond insurance was introduced to mitigate against unfair calling of demand guarantee and we look at this. Finally, we discuss standby letters of credit and the international standby practices.