CAIB 3 CHAPTER 5 EXPECTED QUESTIONS WITH
VERIFIED ANSWERS
Question 1.
Identify the two main classes of bonds issued by surety companies
ANSWER
1. Fidelity Bonds
2. Surety Bonds
Question 2.
Briefly explain the purpose of a Fidelity Bond
ANSWER
To protect the employer from the dishonest acts of their employees. Today employees do not
purchase their own Fidelity Bonds. Instead employers purchase employee dishonesty
insurance
Question 3.
Briefly explain the purpose of a Surety Bond
ANSWER
One party (Surety) to become accountable to another party (Obligee) for the performance of
an obligation by a third party (The Principal)
Question 4.
Identify and explain the three C's that all underwriters take very seriously, and that form the basis of
credit appraisal
ANSWER
1. Character - this involves a review of the company's management performance. Ensure that
the principal is of good character, pays bills promptly and is of good business reputation
2. Capacity - this involves an assessment of the principal's ability based on past history.
3. Capital - the financial capability of the principal to complete the work on hand, in addition to
the project for which bonding is requested
,Question 5.
Explain how in many respects surety companies are like banks
ANSWER
Suretyship involves the same process used by bankers in making a loan. Each is being asked to
lend their credit to another. Banks do not lend money to those who do not meet the eligibility
requirements. Surety companies do not bond people who cannot perform obligations
Question 6.
Identify the benefit of suretyship for the principal and the Obligee
ANSWER
1. Principal - added confidence gained from the fact that the surety is satisfied in their ability to
carry out the required task
2. Obligee - such guarantees provide them with the confidence needed to undertake various
projects
Question 7.
Identify and define the three parties to any surety agreement
ANSWER
1. Principal - the person primarily liable
2. Obligee - the party to whom someone else is obligated under a contract
3. Surety - one who undertakes to pay money or to do any other act in the event the principal
fails therein
Question 8.
Identify the three important characteristics of the guarantee made by the surety to the obligee with
respect to the principal
ANSWER
1. Is a promise made to the Obligee and not to the principal
2. Is a secondary obligation arising only on the default of the principal
3. Surety's duty to pay arises immediately upon the default of the principal
, Question 9.
Identify two methods available to the surety to collect amounts owed to it by the principal
ANSWER
1. Assignment to surety of Obligees rights
2. Right of subrogation
Question 10.
In addition to being a three party contract and the principal liable to the surety, identify six other
characteristics of surety bond
ANSWER
1. No losses expected
2. Of indeterminate length and non-cancellable
3. Statutory or non-statutory in form
4. Bond limit (penalty)
5. Bond premium
6. Written contract
Question 11.
Explain the characteristic - No losses expected
ANSWER
Surety is based on the extension of credit without risk. Theoretically, the surety expects no
losses to occur.
Question 12.
Explain the characteristic - Bond limit (penalty)
ANSWER
Reflect the amount of credit given to the principal by the surety. This limit represents the
amount of the penalty which the surety is prepared to pay in the event the principal should
default
VERIFIED ANSWERS
Question 1.
Identify the two main classes of bonds issued by surety companies
ANSWER
1. Fidelity Bonds
2. Surety Bonds
Question 2.
Briefly explain the purpose of a Fidelity Bond
ANSWER
To protect the employer from the dishonest acts of their employees. Today employees do not
purchase their own Fidelity Bonds. Instead employers purchase employee dishonesty
insurance
Question 3.
Briefly explain the purpose of a Surety Bond
ANSWER
One party (Surety) to become accountable to another party (Obligee) for the performance of
an obligation by a third party (The Principal)
Question 4.
Identify and explain the three C's that all underwriters take very seriously, and that form the basis of
credit appraisal
ANSWER
1. Character - this involves a review of the company's management performance. Ensure that
the principal is of good character, pays bills promptly and is of good business reputation
2. Capacity - this involves an assessment of the principal's ability based on past history.
3. Capital - the financial capability of the principal to complete the work on hand, in addition to
the project for which bonding is requested
,Question 5.
Explain how in many respects surety companies are like banks
ANSWER
Suretyship involves the same process used by bankers in making a loan. Each is being asked to
lend their credit to another. Banks do not lend money to those who do not meet the eligibility
requirements. Surety companies do not bond people who cannot perform obligations
Question 6.
Identify the benefit of suretyship for the principal and the Obligee
ANSWER
1. Principal - added confidence gained from the fact that the surety is satisfied in their ability to
carry out the required task
2. Obligee - such guarantees provide them with the confidence needed to undertake various
projects
Question 7.
Identify and define the three parties to any surety agreement
ANSWER
1. Principal - the person primarily liable
2. Obligee - the party to whom someone else is obligated under a contract
3. Surety - one who undertakes to pay money or to do any other act in the event the principal
fails therein
Question 8.
Identify the three important characteristics of the guarantee made by the surety to the obligee with
respect to the principal
ANSWER
1. Is a promise made to the Obligee and not to the principal
2. Is a secondary obligation arising only on the default of the principal
3. Surety's duty to pay arises immediately upon the default of the principal
, Question 9.
Identify two methods available to the surety to collect amounts owed to it by the principal
ANSWER
1. Assignment to surety of Obligees rights
2. Right of subrogation
Question 10.
In addition to being a three party contract and the principal liable to the surety, identify six other
characteristics of surety bond
ANSWER
1. No losses expected
2. Of indeterminate length and non-cancellable
3. Statutory or non-statutory in form
4. Bond limit (penalty)
5. Bond premium
6. Written contract
Question 11.
Explain the characteristic - No losses expected
ANSWER
Surety is based on the extension of credit without risk. Theoretically, the surety expects no
losses to occur.
Question 12.
Explain the characteristic - Bond limit (penalty)
ANSWER
Reflect the amount of credit given to the principal by the surety. This limit represents the
amount of the penalty which the surety is prepared to pay in the event the principal should
default
