Question 1

It is often a disadvantage to request a letter of credit because of the costs (and the cumbersome process)associated with it.

Accepted Answer

Requesting a letter of credit can be costly and involves a lengthy process, which is often considered a disadvantage.

Question 2

A problem with TradeCard is that it is an extremely expensive alternative.

Accepted Answer

TradeCard is generally considered a cost-effective solution for supply chain finance and trade transactions, as it reduces paperwork, streamlines processes, and can lower transaction costs compared to traditional methods.

Question 3

The greater the exposure,the more secure terms of payment should be.

Accepted Answer

When a business has greater exposure, such as selling to a larger audience or taking on larger transactions, there is typically a higher level of risk involved. In order to mitigate this risk, it is important to have secure terms of payment in place, such as requiring partial payment upfront or using a trusted payment processor. This helps protect the business from payment disputes or fraud.

Question 4

It is possible to add a draft to a letter of credit.

Accepted Answer

A draft can be added as a payment mechanism to a letter of credit. The exporter can present the draft to their bank to receive payment, and the bank will then seek reimbursement from the importer's bank.

Question 5

A bank guarantee payable at first request is one in which the beneficiary does not have to provide any evidence that the terms of the underlying contract between the contractor and the beneficiary have not been met.

Accepted Answer

A bank guarantee payable at first request, also known as a demand guarantee, is a type of guarantee in which the beneficiary can demand payment from the bank without having to provide any evidence that the contractor has failed to fulfill its obligations under the underlying contract. The bank is obligated to pay upon the beneficiary's first request, as long as the demand meets the terms and conditions of the guarantee.

Question 6

A procurement card is conceptually similar to a consumer credit card.

Accepted Answer

A procurement card is a payment card that allows employees to make purchases on behalf of a company or organization. It is conceptually similar to a consumer credit card, but it is designed for business use and has specific features and controls to manage spending and streamline procurement processes.

Question 7

In those few cases in which the letter of credit does not reflect exactly the pro-forma invoice (misspellings for example),it is wiser to attempt to obtain an amendment rather than to issue an invoice that matches the letter of credit.

Accepted Answer

The answer of In those few cases in which the...

Question 8

In most cases,it is wise to have a letter of credit confirmed by the advising bank.

Accepted Answer

The answer of In most cases,it is wise to have...

Question 9

United States law prohibits bank guarantees.

Accepted Answer

Bank guarantees are not prohibited by United States law.

Question 10

A payment guarantee is the most commonly used type of guarantee and is used to ensure that the contractor finishes the project.

Accepted Answer

A payment guarantee ensures the seller gets paid for goods or services provided, while a performance guarantee ensures the contractor finishes the project.

Question 11

A letter of credit is more secure than cash in advance.

Accepted Answer

A letter of credit adds a level of security for both the buyer and seller by involving banks in the transaction, but cash in advance is more secure for the seller since they receive payment before shipping goods or providing services.

Question 12

Usually a bank guarantee is offered by a single bank,rather than multiple banks.

Accepted Answer

The answer of Usually a bank guarantee is offered by...

Question 13

Documentary collections are more cumbersome and expensive than letters of credit.

Accepted Answer

Documentary collections generally involve fewer fees and less paperwork than letters of credit, making them less cumbersome and expensive for the parties involved.

Question 14

An irrevocable letter of credit cannot be canceled by the issuing bank unless the applicant agrees to it.

Accepted Answer

The answer of An irrevocable letter of credit cannot be...

Question 15

A date draft goes into effect at the time the draft is endorsed (signed).

Accepted Answer

A draft goes into effect when it is issued, not when it is endorsed. The endorsement signifies the transfer of the right to receive the payment, but the draft itself is effective from the moment of its creation or issuance.

Question 16

In a letter of credit,the creditworthiness of the exporter is substituted for the creditworthiness of the importer.

Accepted Answer

In a letter of credit, the creditworthiness of the importer is substituted for the creditworthiness of the exporter. The bank issuing the letter of credit guarantees payment to the exporter on behalf of the importer.

Question 17

A date draft transaction solves one of the problems of documentary collection in general: the date at which the importer will endorse the draft.

Accepted Answer

A date draft transaction specifies the exact date on which the importer will endorse the draft, reducing uncertainty and the risk of payment default. This is a key advantage over other forms of documentary collection.

Question 18

Since a draft (or a bill of exchange)is a legal document in the importing country,the courts in the importing country would consider non-payment by an importer as a domestic issue.

Accepted Answer

This is because the draft or bill of exchange is governed by the laws of the importing country, and any disputes regarding non-payment would be resolved in the courts of that country.

Question 19

The responsibilities of the presenting bank in the importing country generally stop at notifying the importer that the documents have arrived and at requesting that the importer endorse the draft or at requesting payment before releasing the documents.This is called trade acceptance.

Accepted Answer

The statement accurately describes the responsibilities of the presenting bank in the importing country.

Question 20

Because some of their cash must be frozen at the issuing bank to guarantee payment,importers often prefer terms other than those of a letter of credit.

Accepted Answer

This is true, as a letter of credit requires a certain amount of cash to be frozen at the issuing bank as collateral, which can be inconvenient and tie up the importer's funds. Therefore, they may prefer other payment terms that are less restrictive.

Quiz 7: Terms of Payment