Question 1

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

Accepted Answer

The answer of Which of the following is not true...

Question 2

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

Accepted Answer

This scenario involves forfaiting, which is the practice of a company selling its trade receivables to a third party at a discount. In this case, the exporter is selling the promissory notes from the importer to a bank at a discounted rate. Accounts receivable financing involves using the company's own receivables as collateral for a loan, which is not the case here. Factoring involves the sale of invoices, not promissory notes. A letter of credit is a financial instrument used to guarantee payment in international trade transactions, but it is not directly related to the scenario described.

Question 3

When using factoring to finance international trade, a bank will provide a loan to the exporter secured by an assignment of the account receivable.

Accepted Answer

The answer of When using factoring to finance international trade,...

Question 4

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

Accepted Answer

The exchange of goods between two parties without the use of currency as a medium of exchange is called bartering, not factoring. Factoring is a financial transaction where a company sells its accounts receivable to a third party at a discount.

Question 5

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

Accepted Answer

A banker's acceptance is not a sight draft, as it is a time draft that is payable at a future date. All of the other statements are true.

Question 6

In ____, the exporter sells accounts receivable without recourse.

Accepted Answer

Factoring involves selling accounts receivable to a third party, known as a factor, without recourse. This means the exporter is not responsible for any bad debts or non-payment by the importer.

Question 7

Countertrade represents foreign trade:

Accepted Answer

Countertrade refers to a transaction where the sale of goods of one country is linked to the purchase or exchange of goods from that same country. It is a way to promote foreign trade when traditional methods of payment are difficult, and it helps to maintain a balance of trade. Countertrade can include barter, counter-purchase, buyback, and offset agreements.

Question 8

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

Accepted Answer

The answer of Under a countertrade arrangement, the exporter ships...

Question 9

The sale of accounts receivable to a third party for a discount is called factoring.

Accepted Answer

Factoring involves selling accounts receivable to a third party at a discounted rate in exchange for immediate cash.

Question 10

Consider a bank that acknowledges that it will make payments on behalf of a beer importer after the beer is delivered to the importer. This reflects:

Accepted Answer

This reflects a letter of credit, which is a type of payment guarantee issued by a bank, where the bank agrees to make payments on behalf of the importer (buyer) to the exporter (seller) once certain conditions are met, such as the delivery of goods. This mitigates the risk for both parties in the transaction. Accounts receivable financing, forfaiting, and factoring all involve the sale or financing of accounts receivable or other financial instruments, and do not apply in this scenario.

Question 11

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

Accepted Answer

The text states that international trade activity has generally increased over time, which means the popularity of trade finance techniques should also increase to support the growing demand for trade financing.

Question 12

A ____ provides a summary of freight charges and conveys title to the merchandise.

Accepted Answer

A bill of lading is a document issued by a carrier (such as a ship, truck, or train company) that provides a summary of the freight charges and conveys title to the merchandise. It serves as a receipt for the goods, as evidence of the contract of carriage, and as a document of title. Letters of credit and banker's acceptances are financial instruments used in international trade, while a bill of exchange is a type of negotiable instrument used in commercial transactions.

Question 13

With ____, a bank purchases a receivable without recourse to the exporter.

Accepted Answer

Factoring is a financial transaction where a bank purchases the exporter's receivable without any recourse. The bank assumes full responsibility for the collection of the debt and the risk of non-payment by the buyer. This provides cash flow to the exporter while transferring the credit and collection risk to the bank. Option A (accounts receivable financing) and option C (a banker's acceptance) may involve recourse to the exporter, while option D (a letter of credit) is a payment method that does not involve purchasing the receivable.

Question 14

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

Accepted Answer

Commercial banks can facilitate international trade by providing services such as letters of credit, which mitigate the credit risk of the importer and provide financing to the exporter until payment is received. Additionally, banks can assist in navigating and complying with government regulations and exchange contract requirements. Therefore, all of the options listed in A, B, and C are reasons why commercial banks can facilitate international trade.

Question 15

____ refers to the purchase of financial obligations, such as bills of exchange or promissory notes, without recourse to the original holder, usually the exporter.

Accepted Answer

Forfaiting refers to the purchase of financial obligations, such as bills of exchange or promissory notes, without recourse to the original holder, usually the exporter. Factoring and accounts receivable financing involve the sale of accounts receivable to a third party, but there is recourse to the original holder if the debts are not collected.

Question 16

A bill of exchange requesting the bank to pay the face amount upon presentation of documents is a:

Accepted Answer

A bill of exchange that requests payment upon presentation of documents is known as a sight draft.

Question 17

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

Accepted Answer

Prepayment provides the supplier with the greatest degree of protection as they receive payment before shipping the goods, eliminating the risk of non-payment.

Question 18

A(n) ____ is an unconditional promise drawn by one party, instructing the buyer to pay the face amount upon presentation.

Accepted Answer

The answer of A(n) ____ is an unconditional promise drawn...

Question 19

A letter of credit does not guarantee that the goods purchased will be those invoiced and shipped.

Accepted Answer

A letter of credit guarantees payment to the seller, but it does not ensure that the goods will meet the buyer's specifications or that they will be received in satisfactory condition. It is the buyer's responsibility to inspect the goods upon receipt and raise any concerns with the seller.

Question 20

In ____, a bank arranges to fund a loan to pay the exporter instead of charging the importer's account immediately.

Accepted Answer

The answer of In ____, a bank arranges to fund...

Quiz 17: Financing International Trade