Question 1

In the event that a discrepancy is found in the documents presented under a letter of credit, the bank may request a waiver or:

Accepted Answer

If a discrepancy is found in the documents, the bank has the right to refuse to pay against them, as they do not fulfill the requirements of the letter of credit. This is the most common and appropriate action for the bank to take in this situation.

Question 2

Bills of exchange are governed in the U.S. by the _____, in England by the _____, and in over 20 other countries by the _____

Accepted Answer

In the U.S., bills of exchange are governed by the Uniform Commercial Code (UCC), in England by the Bills of Exchange Act, and in over 20 other countries by the Convention on Bills of Exchange and Promissory Notes.

Question 3

The type of letter of credit issued to guarantee that a party will fulfill its obligations under a service, construction, or sales contract is called:

Accepted Answer

A standby Letter of Credit is specifically designed to provide assurance that a party will fulfill its obligations under a contract, such as for services, construction, or sales. It serves as a guarantee of payment or performance if the party fails to fulfill their obligations. An Irrevocable Letter of Credit is a type of letter of credit that cannot be changed or canceled without the consent of all parties involved. A confirmed Letter of Credit is a letter of credit that has been confirmed by the issuing bank's correspondent bank, providing another layer of assurance that payment will be made. A letter of Warranty Credit is not a commonly used term in the context of letters of credit.

Question 4

The rule that usually prevails for interpreting documents that are submitted to a bank for payment under a letter of credit is commonly called the:

Accepted Answer

The strict compliance rule is the most common rule used by banks when interpreting documents submitted for payment under a letter of credit. This means that the bank will only approve payment if the documents presented comply exactly with the requirements specified in the letter of credit. Any discrepancies or errors may result in the bank rejecting the documents and refusing payment. The other options listed are related to different legal principles and rules.

Question 5

Bolero is a private company founded by a consortium of the world's largest banks to provide secure "digital identities" or signatures for confidentiality and authentication of financial and legal documents.

Accepted Answer

Bolero is a global trade finance digitization platform that provides electronic bill of lading and multi-bank trade finance solutions, rather than focusing solely on providing secure digital identities or signatures for financial and legal documents.

Question 6

A letter of credit is a contract between:

Accepted Answer

The answer of A letter of credit is a contract...

Question 7

A draft due at a future date or after a specified period of time that has been signed by the buyer is called:

Accepted Answer

The answer of A draft due at a future date...

Question 8

Maurice O'Meara Co. v. National Park Bank of New York involved a letter of credit for a shipment of newsprint. The bank was concerned that the shipment was not as represented in the documents. In finding in favor of the seller's assignee, the court:

Accepted Answer

The case of Maurice O'Meara Co. v. National Park Bank of New York is a landmark case in the realm of letter of credit law. The court emphasized the independence principle, stating that banks are obligated to pay under a letter of credit regardless of any disputes between the buyer and seller, as long as the documents are in compliance with the terms of the letter of credit. Therefore, the bank's concerns about the shipment were irrelevant to its duty to pay under the letter of credit. The court did not address the issue of inspection or strict compliance with the terms of the letter of credit.

Question 9

When the Seller's bank guarantees payment under the letter of credit issued by buyer's bank it becomes a(n):

Accepted Answer

When the Seller's bank guarantees payment under the letter of credit issued by buyer's bank, it is known as a confirmed letter of credit. This type of letter of credit provides extra assurance to the seller that payment will be received even if the buyer's bank defaults on payment. The seller's bank acts as an intermediary between the buyer's bank and the seller, ensuring that the payment is made according to the terms of the letter of credit.

Question 10

An international draft is an order from the seller to the buyer or the buyer's bank to pay the seller upon delivery of goods or the presentation of documents. Thus, the seller is both:

Accepted Answer

In an international draft, the seller is the drawer because they issue the draft, and they are also the payee because they are the party that receives the payment.

Question 11

If the buyer's or seller's bank stamps its name, date, and signature on the face of a draft, it becomes a:

Accepted Answer

When a bank stamps its name, date, and signature on the face of a draft, it becomes a banker's acceptance. This signifies that the bank has accepted the responsibility for the payment of the draft on the due date. The buyer can then use the banker's acceptance to pay the seller, knowing that the payment is backed by the bank's creditworthiness.

Question 12

Suppose that an issuing bank pays on documents that are conforming to the requirements of the letter of credit, but the seller has shipped worthless goods to the buyer. Which of the following statements, if any, are true?

Accepted Answer

The strict compliance principle means the bank's obligation is limited to the documents, not the actual goods. The bank is not liable for the quality of goods as long as documents comply.

Question 13

The type of letter of credit that can be split up between many suppliers, each able to present their own documents for payment and allowing the trader to take his profits from the balance of the credit, is called:

Accepted Answer

A transferable credit allows the trader to split the credit between multiple suppliers, who can then present their own documents for payment. This allows the trader to take his profits from the balance of the credit.

Question 14

The issuing bank is required to pay on documents in case of _____, but not in the event of:

Accepted Answer

The answer of The issuing bank is required to pay...

Question 15

A documentary draft issued for the purchase of goods by ABC Co. payable to XYZ Co., payable upon presentation, defines ABC Co. as the _____, XYZ Co. as the _____, and the specialized name for the documentary draft is _____

Accepted Answer

The answer of A documentary draft issued for the purchase...

Question 16

The bank that is responsible for inspecting the documents to be sure they are in order, remitting payment to the seller, and negotiating the documents to the buyer is called:

Accepted Answer

The answer of The bank that is responsible for inspecting...

Question 17

Which of the following institutions does not provide credit guarantees to back trade finance lending by commercial institutions?

Accepted Answer

The Federal Reserve Bank primarily focuses on monetary policy and does not provide credit guarantees for trade finance lending. The Eximbank, Commodity Credit Corporation, and Agency for International Development are all institutions that provide credit guarantees to support trade finance lending.

Question 18

A holder in due course rule, where a purchaser of an acceptance, or any negotiable instrument, takes it free from most disputes that may arise between the drawer and drawee and is regulated under the Uniform Customs and Practice for Documentary Credits.

Accepted Answer

The holder in due course rule, which allows a purchaser of a negotiable instrument to take it free from most disputes between the original parties, is governed by the Uniform Commercial Code (UCC), not the Uniform Customs and Practice for Documentary Credits (UCP), which primarily deals with letters of credit.

Question 19

In a global trade transaction seller would ship monster cables from Port of Oakland to Bangkok, Thailand under an irrevocable letter of credit.  The Thai buyer's bank issued the letter of credit with the instruction that the monster cables be placed aboard the George Mason on November 25, 2013.  The loading brokers loaded the monster cables on board the ship on November 26, 2013 at 0100 hours (i.e. 1 am).  On the manifest the broker wrote placed on board November 25, 2013.  The confirming bank refuses to pay due to the fraud.  Is the confirming bank obligated to pay to beneficiary or holder of the letter of credit.

Accepted Answer

The answer of In a global trade transaction seller would...

Question 20

The internationally accepted body of rules pertaining to letters of credit is:

Accepted Answer

The internationally accepted body of rules pertaining to letters of credit is the Uniform Customs and Practices for Documentary Credits, commonly referred to as UCP 600. The UCP is recognized by courts and trade practitioners worldwide and has been adopted by most countries. Options A, C, and D are not relevant to the rules governing letters of credit.

Quiz 7: Bank Collections and Letters of Credit