What is interest on the purchase of cash bonds?
A purchase money security right is a type of credit agreement between two parties that allows the buyer to protect the seller of goods against credit default. It does this by allowing the seller the legal right to essentially recover the future goods it will sell to the buyer if future payments are not made immediately. This is especially useful when the buyer holds the goods as stock. Having a cash purchase guarantee allows the seller to have rights to the stock before any other creditors who may have claims to the buyer's assets.
Credit arrangements are the way most business is done in the modern world. This is especially true in terms of business between two companies, where one company supplies goods to another company, which then holds the goods as inventory until it can sell them. If the buyer has financial problems, the initial seller of the merchandise may feel the repercussions of those problems. For this reason, a purchase money security entitlement is used to protect the seller from the buyer's credit default.
As an example, imagine a situation where a company has an existing agreement to sell goods to a distributor, who then resells the goods to the public. Unfortunately, the reseller is constantly late on recent payments, causing some consternation on the part of the selling company. The dealer contacts the seller and promises he can recover, and the seller decides he doesn't want to give up a profitable relationship. Instead, you agree to a purchase money guarantee with the dealer.
The money-of-purchase guarantee allows the selling company to be protected against any further credit problems on the part of the reseller. Part of the agreement requires the seller to contact other creditors with security claims about the dealer's operations. In this case, the seller informs these other creditors that the seller's claims on the stock it sells to the reseller supersedes all other claims.
If the dealer makes future payments on time, the credit relationship can continue. On the other hand, if the reseller continues to have difficulty making payments, the seller can retrieve the goods that the reseller held in stock. Also, if the items have been sold and the reseller has not yet paid, the seller can claim the product from the sold products. It is important to note that purchase cash collateral interest only covers future goods sold and not outstanding debt incurred prior to settlement.