A letter of credit is an agreement between a buyer's bank and a seller's bank, where the buyer's bank guarantees to pay a certain amount to the seller upon receipt of specific documentation, typically related to the shipment of goods. This provides a level of security for both parties, as the seller knows they will be paid if they fulfill their obligations, and the buyer knows they will receive the goods they paid for.

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A Letter of Credit

Question 276

Multiple Choice

A letter of credit:

A) is a written instrument that orders payment of a certain sum of money to the party specified by the bill
B) is a financial document that permits the exporter to ship goods between countries without pre-customs clearance
C) is an agreement by the bank of the buyer to pay a certain sum to the seller upon receipt of certain documentation
D) is a government document that provides for the purchase of goods from foreign sellers on open account
E) allows a company to repatriate its foreign profits

Correct Answer: