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Maintenance Bond

What is 'Maintenance Bond'

A type of surety bond purchased by a contractor that protects the owner of a completed construction project for a specified time period against defects and faults in materials, workmanship and design that could arise later if the project was done incorrectly. A maintenance bond is not technically insurance, but basically functions as an insurance policy on a construction project to make sure a contractor will either correct any defects that arise or that the owner is compensated for those defects. Pricing a maintenance bond is very different from pricing regular coupon paying bonds.

Explaining 'Maintenance Bond'

A surety bond is a three-way contract where a third party called the surety guarantees the contractual obligations of one party (the principal) to another party (the obligee) by agreeing to pay a sum to the obligee as compensation if the principal does not fulfill its obligations. The surety assures the obligee that the principal will perform the required tasks. A maintenance bond is structured in such a way.


Further Reading


Resolving the infrastructure funding crisis in Australian local government: A bond market issue approach based on local council income
search.informit.com.au [PDF]
… pricing of the bond issue is discussed in more detail in the appendix … There seems to be general agreement within the finance profession that the bondholder-stockholder relationship entails … affects the optlmal choice of linanctal structure and the value of the firm's financial claims …

The economic implications of corporate financial reportingThe economic implications of corporate financial reporting
www.sciencedirect.com [PDF]
… pricing of the bond issue is discussed in more detail in the appendix … There seems to be general agreement within the finance profession that the bondholder-stockholder relationship entails … affects the optlmal choice of linanctal structure and the value of the firm's financial claims …

Research, knowledge, and the art of 'paradigm maintenance': the World Bank's Development Economics Vice-Presidency (DEC)Research, knowledge, and the art of 'paradigm maintenance': the World Bank's Development Economics Vice-Presidency (DEC)
www.tandfonline.com [PDF]
… pricing of the bond issue is discussed in more detail in the appendix … There seems to be general agreement within the finance profession that the bondholder-stockholder relationship entails … affects the optlmal choice of linanctal structure and the value of the firm's financial claims …

Private financing of transport infrastructure: an assessment of the UK experiencePrivate financing of transport infrastructure: an assessment of the UK experience
www.ingentaconnect.com [PDF]
… pricing of the bond issue is discussed in more detail in the appendix … There seems to be general agreement within the finance profession that the bondholder-stockholder relationship entails … affects the optlmal choice of linanctal structure and the value of the firm's financial claims …

The economic effects of public financing: Evidence from municipal bond ratings recalibrationThe economic effects of public financing: Evidence from municipal bond ratings recalibration
academic.oup.com [PDF]
… pricing of the bond issue is discussed in more detail in the appendix … There seems to be general agreement within the finance profession that the bondholder-stockholder relationship entails … affects the optlmal choice of linanctal structure and the value of the firm's financial claims …

Basic infrastructure for socio-economic development, environmental protection and geographical desegregation: South Africa's unmet challengeBasic infrastructure for socio-economic development, environmental protection and geographical desegregation: South Africa's unmet challenge
www.sciencedirect.com [PDF]
… pricing of the bond issue is discussed in more detail in the appendix … There seems to be general agreement within the finance profession that the bondholder-stockholder relationship entails … affects the optlmal choice of linanctal structure and the value of the firm's financial claims …

Bond financing for renewable energy in AsiaBond financing for renewable energy in Asia
www.sciencedirect.com [PDF]
… pricing of the bond issue is discussed in more detail in the appendix … There seems to be general agreement within the finance profession that the bondholder-stockholder relationship entails … affects the optlmal choice of linanctal structure and the value of the firm's financial claims …



Q&A About Maintenance Bond


How do you price a surety bond ?

You must first determine what kind of risk you want to cover , then look at your current portfolio of business . If there is no current business that covers this risk , then you will need to find new business . Once you have determined how much coverage you need , then you can price your new business .

Is it possible to have insurance on an insurance policy?

Yes, this is possible with surety bonds.

What factors affect pricing ?

There are many factors that affect pricing including credit rating , industry experience , financial strength , claims history etc ...

How long does the protection last?

The protection lasts for a specified time period.

Who purchases maintenance bonds?

Contractors purchase maintenance bonds.

What does a maintenance bond protect against?

Maintenance bonds protect against defects and faults in materials, workmanship and design.

How do you price a regular coupon paying bond ?

You can use yield curves or other methods such as duration analysis or option pricing models .

How are surety bonds different from regular coupon paying bonds?

Surety Bonds are three-way contracts where one party (the principal) agrees to fulfill its obligations to another party (the obligee) while being guaranteed by yet another party (the surety). Regular coupon paying bonds are two-way contracts between two parties where one party pays interest payments to another party as agreed upon in the contract.

What is a maintenance bond?

A type of surety bond purchased by a contractor that protects the owner of a completed construction project for a specified time period against defects and faults in materials, workmanship and design that could arise later if the project was done incorrectly.