Question 1

Standby letters of credit are used only in international trade situations.

Accepted Answer

A) True 
 B)False  False

Question 2

In a guaranty contract, the obligor is called a:

Accepted Answer

A) surety. 
B) principal. 
C) guarantor. 
D) creditor. 
A) surety. 
B) principal. 
C) guarantor. 
D) creditor. C

Question 3

A(n) __________  is an undertaking by one person, for consideration, to pay another person a sum of money in the event of a specified loss.

Accepted Answer

A) ​absolute guaranty 
B) indemnity contract 
C) ​guaranty of payment 
D) ​suretyship 
A) ​absolute guaranty 
B) indemnity contract 
C) ​guaranty of payment 
D) ​suretyship B

Question 4

A debtor-creditor relationship is essentially a bi-lateral contract with enforceable rights and duties for both parties.

Accepted Answer

A) True 
 B)False

Question 5

Bailment given as security for the payment of a debt is a(n): ______.

Accepted Answer

A) ​pledge. 
B) contribution. 
C) ​guaranty. 
D) ​subrogration. 
A) ​pledge. 
B) contribution. 
C) ​guaranty. 
D) ​subrogration.

Question 6

All of the following contract defenses can be raised as a defense against suretyship obligations except: ________.

Accepted Answer

A) ​Lack of capacity 
B) Absence of consideration 
C) ​Mistake 
D) ​Noncompliance with Statute of Frauds 
A) ​Lack of capacity 
B) Absence of consideration 
C) ​Mistake 
D) ​Noncompliance with Statute of Frauds

Question 7

In a letter or credit, the _______ will be the drawer of the drafts that will be drawn under a letter of credit.

Accepted Answer

A) ​correspondent bank. 
B) issuer. 
C) ​beneficiary. 
D) ​advising bank. 
A) ​correspondent bank. 
B) issuer. 
C) ​beneficiary. 
D) ​advising bank.

Question 8

In most states contracts of guaranty do not have to be in writing to be enforceable.

Accepted Answer

A) True 
 B)False

Question 9

Subrogation is an agreement that a party shall not be liable for loss.

Accepted Answer

A) True 
 B)False

Question 10

Bud is unable to obtain a loan without some form of additional reassurances.Bud comes to you for assistance.You are willing to help Bud, but you wish to protect yourself from liability as much as possible.Would you prefer a surety or a guaranty? The bank issuing the loan also wishes to protect itself as much as possible.Would the bank prefer a surety or guaranty? If your oral assurances are enough to solidify the loan, has a surety or guaranty been formed?

Accepted Answer

Under either a surety or a guaranty, you

Question 11

Under the independence rule banks cannot, except in limited circumstances, delve into the underlying contract issues and must only focus on the terms of the letter of credit.

Accepted Answer

A) True 
 B)False

Question 12

A letter of credit usually sets a:

Accepted Answer

A) ​minimum money amount. 
B) maximum money amount. 
C) ​duration. 
D) ​strict compliance rule. 
A) ​minimum money amount. 
B) maximum money amount. 
C) ​duration. 
D) ​strict compliance rule.

Question 13

A letter of credit cannot extend for a period of more than five (5) years.

Accepted Answer

A) True 
 B)False

Question 14

A surety is liable from the moment the principal is in default.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is not a suretyship defense?

Accepted Answer

A) ​statute of limitations 
B) performance of the obligation by the principal debtor 
C) ​creditor substitution of the original debtor with a new one 
D) ​insolvency of bankruptcy of the principal debtor 
A) ​statute of limitations 
B) performance of the obligation by the principal debtor 
C) ​creditor substitution of the original debtor with a new one 
D) ​insolvency of bankruptcy of the principal debtor

Question 16

Letter of credit transactions involve ______ contract(s).

Accepted Answer

A) ​one (1) 
B) two (2) 
C) ​three (3) 
D) ​four (4) 
A) ​one (1) 
B) two (2) 
C) ​three (3) 
D) ​four (4)

Question 17

The issuer of a letter of credit has a duty to verify that the underlying transaction has been performed.

Accepted Answer

A) True 
 B)False

Question 18

An agreement under which one party agrees to pay drafts drawn by a creditor is called a: ______.

Accepted Answer

A) ​contract of surety. 
B) guaranty contract. 
C) ​letter of credit. 
D) ​debtor's agreement. 
A) ​contract of surety. 
B) guaranty contract. 
C) ​letter of credit. 
D) ​debtor's agreement.

Question 19

Pasquale and Paul were sureties on the debt of Rose.Each had a $100,000 responsibility.Upon Rose's default, Pasquale paid $50,000 to the creditor.How much may Pasquale recover from Paul under the concept of contribution?

Accepted Answer

A) ​Zero 
B) $50,000 
C) ​$10,000 
D) ​$25,000 
A) ​Zero 
B) $50,000 
C) ​$10,000 
D) ​$25,000

Question 20

If an issuer requests its correspondent bank where the beneficiary is located to notify the beneficiary of the issuance of a letter of credit, the correspondent bank is called a(n):

Accepted Answer

A) ​advising bank. 
B) foreign bank. 
C) ​consulting bank. 
D) ​coissuer. 
A) ​advising bank. 
B) foreign bank. 
C) ​consulting bank. 
D) ​coissuer.

Exam 31: Nature of the Debtor-Creditor Relationship

Standby letters of credit are used only in international trade situations.

In a guaranty contract, the obligor is called a:

A(n) __________ is an undertaking by one person, for consideration, to pay another person a sum of money in the event of a specified loss.

A debtor-creditor relationship is essentially a bi-lateral contract with enforceable rights and duties for both parties.

Bailment given as security for the payment of a debt is a(n): ______.

All of the following contract defenses can be raised as a defense against suretyship obligations except: ________.

In a letter or credit, the _______ will be the drawer of the drafts that will be drawn under a letter of credit.

In most states contracts of guaranty do not have to be in writing to be enforceable.

Subrogation is an agreement that a party shall not be liable for loss.

Under the independence rule banks cannot, except in limited circumstances, delve into the underlying contract issues and must only focus on the terms of the letter of credit.

A letter of credit usually sets a:

A letter of credit cannot extend for a period of more than five (5) years.

A surety is liable from the moment the principal is in default.

Which of the following is not a suretyship defense?

Letter of credit transactions involve ______ contract(s).

The issuer of a letter of credit has a duty to verify that the underlying transaction has been performed.

An agreement under which one party agrees to pay drafts drawn by a creditor is called a: ______.

Pasquale and Paul were sureties on the debt of Rose.Each had a $100,000 responsibility.Upon Rose's default, Pasquale paid $50,000 to the creditor.How much may Pasquale recover from Paul under the concept of contribution?

If an issuer requests its correspondent bank where the beneficiary is located to notify the beneficiary of the issuance of a letter of credit, the correspondent bank is called a(n):

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