Deck 19: Financing International Trade

Question 1

An importer always has the option to cancel an irrevocable letter of credit.

Answer 1

False

Question 2

A letter of credit does not guarantee that the products shipped will be those described in the documents.

Answer 2

True

Question 3

In factoring, a bank provides an exporter with a loan that is secured by the exporter's accounts receivable.

Answer 3

False

Question 4

A time draft that is issued by a firm and guaranteed by a bank is called a banker's acceptance.

Question 5

If shipment is made under a forfaiting draft, the exporter is paid once shipment has been made and the draft is presented to the importer for payment.

Question 6

A bank will be willing to create a letter of credit on behalf of an importer only if it trusts the importer's creditworthiness.

Question 7

Syndicates of banks may be involved in forfaiting transactions because these transactions are usually in excess of $500,000.

Question 8

The payment method that affords the exporter the greatest degree of protection is the prepayment method.

Question 9

Under prepayment, the exporter will not ship the products until the exporter has received payment from the importer.

Question 10

If shipment is made under a time draft, the exporter is paid as soon as the products have been shipped and the draft is presented to the importer for payment.

Question 11

Factoring involves the sale of accounts receivable to a third party, called a factor, for a discount.

Question 12

There is an active secondary market for banker's acceptances.

Question 13

Under a letter of credit, the exporter will not ship the products until the importer has sent payment to the exporter.

Question 14

Under a countertrade arrangement, the exporter ships the products to the importer while retaining title to the merchandise until it is sold.

Question 15

The exchange of products between two parties without the use of any currency as a medium of exchange is called factoring.

Question 16

The term "counterpurchase" denotes the exchange of products between two parties under two distinct contracts expressed in monetary terms.

Question 17

The Overseas Private Investment Corporation (OPIC) is owned by a consortium of commercial banks and industrial companies; it cooperates closely with the Export-Import Bank.

Question 18

When an exporter sells an account receivable to a factor, the factor will attempt to collect payment from the importer, but if the importer is unable to pay, the factor can collect the payment from the exporter.

Question 19

In an open account transaction, the exporter ships the products to the importer but retains title to the products until they have been sold.

Question 20

An irrevocable letter of credit cannot be amended or canceled without the exporter's consent.

Question 21

A bill of exchange serves as a receipt for shipment and a summary of freight charges; most importantly, it conveys title to the merchandise.

Question 22

​According to the text, international trade activity has generally ____ over time. This should cause the popularity of trade finance techniques to ____ over time.

A) ​increased; increase
B) ​increased; decrease
C) ​decreased; increase
D) ​decreased; decrease

Question 23

In a countertrade transaction, banks on both ends act as intermediaries in the processing of shipping documents and the collection of payment.

Question 24

The all-in rate a bank charges for a banker's acceptance includes both the interest rate and the acceptance commission.

Question 25

The Working Capital Loan Guarantee Program of the Private Export Funding Corporation (PEFCO) encourages commercial banks to extend short-term export financing to eligible exporters by providing a comprehensive guarantee that covers 90 percent of the loan's principal and interest.

Question 26

A banker's acceptance is a time draft that is issued by a firm and guaranteed by a(n):

A) bank.
B) importer.
C) exporter.
D) None of these are correct.

Question 27

All types of foreign trade transactions in which the sale of products to one country is linked to the purchase or exchange of products from that same country are called countertrade.

Question 28

A bank issuing a letter of credit on behalf of an importer is obligated to make the payment due under the letter of credit regardless of the importer's willingness or ability to pay.

Question 29

The all-in rate charged on banker's acceptances is higher than the prime-based rate that a bank would charge a creditworthy borrower for a regular loan.

Question 30

Cross-border factoring involves a network of factors in various countries that assess importers' credit risk.

Question 31

____ refers to medium-term financing in which financial obligations, such as bills of exchange or promissory notes, are purchased from the original holder, usually the exporter; the obligations are sold "without recourse," meaning that if the importer does not pay, the exporter has no responsibility for their payment.

A) Factoring
B) Accounts receivable financing
C) Forfaiting
D) None of these are correct.

Question 32

An exchange of products between two parties under two distinct contracts expressed in monetary terms is:

A) compensation.
B) a counterpurchase.
C) factoring.
D) accounts receivable financing.

Question 33

Which of the following is a reason why commercial banks may facilitate international trade?

A) The exporter may not wish to accept the credit risk of the importer.
B) The government may impose foreign exchange controls that prevent payment by the importer to the exporter.
C) The exporter may need financing until payment for the products is received.
D) All of these are correct.

Question 34

The commission earned by the bank for creating a banker's acceptance is reflected in the all-in rate.

Question 35

Who is obligated to make payment once proof of shipment of goods is documented in a letter of credit?

A) the exporter
B) the importer
C) the importer's bank
D) the importer's government

Question 36

As part of the Ex-Im Bank's export credit insurance programs, a(n) ____ Policy is generally issued to an administrator, such as a bank, trading company, insurance broker, or government agency, which then administers the policy for multiple exporters.

A) Multi-Buyer
B) Single-Buyer
C) Small Business
D) Umbrella

Question 37

Most of the programs of the Export-Import Bank of the United States are designed to encourage private lenders to finance export trade by assuming some of the credit risk and providing financing to foreign importers when private lenders are unwilling to do so.

Question 38

The commission that a bank charges for a banker's acceptance is referred to as the all-in rate; it is the only cost involved in an acceptance.

Question 39

​Consider an importer that issues a promissory note to an exporter to pay for imported capital goods over a period of five years. The exporter sells the note at a discount to a bank. This reflects:

A) ​accounts receivable financing.
B) ​forfaiting.
C) ​factoring.
D) ​a letter of credit.

Question 40

Which of the following is not true regarding letters of credit?

A) A letter of credit is a written commitment by the importer's bank on the importer's behalf promising to pay the exporter when it presents documents showing that the products have been shipped.
B) The letters of credit used in international trade are irrevocable.
C) Letters of credit guarantee that the products shipped are the products purchased.
D) All of these are true.

Question 41

The ____ is a private corporation owned by a consortium of commercial banks and industrial companies, but the ____ is a self-sustaining government agency formed in 1971.

A) Overseas Private Investment Corporation (OPIC); Private Export Funding Corporation (PEFCO)
B) Private Export Funding Corporation (PEFCO); Overseas Private Investment Corporation (OPIC)
C) Private Export Funding Corporation (PEFCO); Ex-Im Bank
D) Overseas Private Investment Corporation (OPIC); Ex-Im Bank

Question 42

Which of the following payment terms provides the exporter with the greatest degree of protection?

A) letters of credit
B) consignment
C) prepayment
D) drafts (sight/time)

Question 43

Which of the following is not a program of the Export-Import Bank of the United States?

A) Working Capital Loan Guarantee Program
B) Project Finance Loan Program
C) Direct Loan Program
D) Foreign Sales Corporation Program

Question 44

With a(n) ____ arrangement, the exporter ships the products to the importer while still retaining actual title to the merchandise; the importer does not have to pay for the products until they have been sold to a third party.

A) letter of credit
B) open account
C) draft
D) consignment

Question 45

​Consider an exporter that ships products to an importer on credit. The exporter needs funds immediately, so it obtains a loan from a bank using the account receivable as collateral. This reflects:

A) ​accounts receivable financing.
B) ​forfaiting.
C) ​factoring.
D) ​a letter of credit.

Question 46

With ____, the importer's bank promises to pay the exporter if the importer fails to pay as agreed.

A) a standby letter of credit
B) a bill of exchange
C) forfaiting
D) accounts receivable financing

Question 47

​The risk to the exporter is highest with the ____ payment method.

A) ​prepayment
B) ​letter of credit
C) ​sight draft
D) ​open account

Question 48

​When products are shipped under a ______, the importer that accepts the draft is promising to pay the exporter at a specified future date.

A) ​prepayment arrangement
B) ​time draft
C) ​counterpurchase arrangement
D) ​sight draft

Question 49

In a(n) ____ or clearing-account arrangement, the delivery of products to the importer is compensated for by the exporter's buying back a certain amount of the product from the importer.

A) accounts receivable financing
B) compensation
C) counterpurchase
D) barter

Question 50

​Consider an exporter that sells its accounts receivables to another firm that becomes responsible for obtaining payment from the various importers. This reflects:

A) ​accounts receivable financing.
B) ​consignment.
C) ​factoring.
D) ​a letter of credit.

Question 51

Which of the following is not true regarding a banker's acceptance?

A) The exporter benefits because it does not have to worry about the credit risk of the importer.
B) The importer benefits because it obtains greater access to foreign markets when purchasing supplies.
C) The bank guaranteeing the draft earns a commission for creating an acceptance.
D) It is a sight draft.
E) All of these are true.

Question 52

The Working Capital Loan Guarantee Program is administered by the:

A) Private Export Funding Corporation (PEFCO).
B) Overseas Private Investment Corporation (OPIC).
C) Ex-Im Bank.
D) Foreign Credit Insurance Association (FCIA).

Question 53

The ____ was established in 1934 with the intention to facilitate Soviet-American trade.

A) Domestic International Sales Corporation (DISC)
B) Private Export Funding Corporation (PEFCO)
C) Export-Import Bank
D) Foreign Credit Insurance Association (FCIA)

Question 54

​A ____ provides a summary of freight charges and conveys title to the merchandise in an international shipment.

A) ​letter of credit
B) ​banker's acceptance
C) ​bill of lading
D) ​bill of exchange

Question 55

​The Direct Loan Program is administered by the:

A) ​Private Export Funding Corporation (PEFCO).
B) ​Overseas Private Investment Corporation (OPIC).
C) ​Ex-Im Bank.
D) ​Foreign Credit Insurance Association (FCIA).

Question 56

​Consider a bank that acknowledges that it will make payment on behalf of a computer importer after the bank receives documents showing that the computers have been shipped to the importer. This reflects:

A) ​accounts receivable financing.
B) ​forfaiting.
C) ​factoring.
D) ​a letter of credit.

Question 57

When products are shipped under a ______, the exporter is paid once the shipment is made and the draft is presented to the importer for payment.

A) consignment arrangement
B) time draft
C) prepayment arrangement
D) sight draft

Question 58

​____ is(are) not a type of program offered by the Ex-Im Bank.

A) ​Guarantees
B) ​Loans
C) ​Currency swap insurance
D) ​Bank insurance

Question 59

Which of the following would not be included in a bill of lading?

A) the names of the exporter and importer
B) the terms of payment
C) the date of shipment
D) All of these would be included in a bill of lading.

Question 60

​A ____ is a written order from the exporter instructing the importer to pay the face amount either upon presentation or at a specified future date.

A) ​draft
B) ​bill of lading
C) ​compensation guarantee
D) ​letter of credit

Question 61

Under a letter of credit (L/C) arrangement, the _____ issues the L/C and sends it to the ____.

A) importer's government; exporter's government
B) importer's bank; exporter's bank
C) exporter's government; importer's government
D) exporter's bank; exporter's government

Question 62

Which of the following would be included in a commercial invoice?

A) the names of the exporter and importer
B) the price of the merchandise
C) the terms of payment
D) All of these would be included in a commercial invoice.

Question 63

​MNCs can use ____ to sell their existing accounts receivable as a means of obtaining cash.

A) ​factoring
B) ​a bill of lading
C) ​a banker's acceptance
D) ​a letter of credit

Question 64

Which of the following is not a document that might be included in the documents for an international shipment under a letter of credit?

A) an ocean bill of lading
B) an airway bill
C) a commercial invoice
D) a bill of lading
E) a barter notification
Answer Key

Question 65

​The time period of most time drafts ranges from

A) ​30 days to 180 days.
B) ​2 weeks to 52 weeks.
C) ​1 year to 5 years.
D) ​10 days to 60 days.

Question 66

Which of the following is not a payment method used for international trade?

A) consignment
B) open account
C) factoring
D) draft
E) letter of credit