Deck 7: Bank Collections and Letters of Credit

Question 1

Government agencies in the U.S.are not allowed to insure payments made to a U.S.bank if the underlying contract between the buyer and seller is entirely independent from the letter of credit.

Answer 1

False

Question 2

A Bill of Exchange is a specialized type of non-negotiable instrument used to expedite payment in a documentary sale.

Answer 2

False

Question 3

If the issuing bank accepts documents that contain a discrepancy,the bank cannot seek reimbursement from the account party,its customer.

Answer 3

True

Question 4

In order to negotiate an order instrument,it must be indorsed and delivered.

Question 5

A documentary draft is a time draft that has thirty (30)day and sixty (60)day increments used in documentary sale transactions.

Question 6

Under accounts receivable financing,the factor is protected from contract claims for defective goods by the holder in due course rules.

Question 7

The issuing bank will honor the draft as long as the documents appear to be in good order on their face and correspond to the terms of the letter of credit,regardless of the conditions of the goods received.

Question 8

"Bill of exchange" and "international draft" are two names for the same type of negotiable instrument.

Question 9

The holder of a banker's acceptance may convert it to cash immediately at a discount rate,sell it on the discount market,or hold it until it matures,provided the buyer's account has sufficient funds to cover the transaction.

Question 10

The seller's bank acting as an advising bank agrees to transmit the funds received from the buyer's bank to the seller provided the terms of the letter of credit have been satisfied completely.

Question 11

The Convention on Bills of Exchange as well as U.S.and English domestic laws require the language "bill of exchange" to appear clearly and prominently on the face of the instrument.

Question 12

Letters of credit is a revocable commitment by a bank issued on behalf of its client and promising to pay a specific sum of money to a beneficiary upon compliance with the instructions of the letter of credit.

Question 13

Under a documentary collection,the banks are acting as the agent of the buyer for collection purposes.

Question 14

Terms of the sales contract must be reflected in the letter of credit,if not the buyer must clear all discrepancies upon examination of the letter of credit.

Question 15

The obligations under the letter of credit between the seller and buyer and independent of the sales contract between the seller and the buyer.

Question 16

The SWIFT System is an electronic network to handle for the exclusive transmission of international banking transactions and regulated by the World Bank.

Question 17

A back-to-back letter of credit is actually two letters of credit used as a financing device.

Question 18

Under the UCP,banks are responsible for the consequences of delay or loss in transit of any messages,credits,or documents,or for errors of any telecommunication.

Question 19

Letters of credit are a bank's promise to pay provided that all of the terms and documents required submitted are correct.

Question 20

A red clause in a letter of credit is a promise by the advising bank to reimburse the seller's bank for loans made to the seller.

Question 21

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:

A) emphasized the independence principle in letter of credit transactions.
B) focused on the bank's legal right to refuse documents that do not strictly comply with the terms of the letter of credit.
C) upheld the bank's right to have an inspection to test the tensile strength of the newsprint.
D) emphasized the independence principle in letter of credit transactions and upheld the bank's right to have an inspection to test the tensile strength of the newsprint only.

Question 22

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

A) Article 5 of the Uniform Commercial Code.
B) Uniform Customs and Practices for Documentary Credits.
C) Convention on Bills of Exchange and Promissory Notes.
D) Uniform Code of Practice for Letters of Credit.

Question 23

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

A) fraud; breach of warranty.
B) delivery of the goods; non-delivery of the goods.
C) breach of warranty; fraud.
D) issuing banks are not the paying banks.

Question 24

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.

Question 25

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:

A) an Irrevocable Letter of Credit.
B) standby Letter of Credit.
C) letter of Warranty Credit.
D) confirmed Letter of Credit.

Question 26

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.

Question 27

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

A) Bills of Exchange Act; Convention on Bills of Exchange and Promissory Notes; The Uniform Commercial Code.
B) Uniform Commercial Code; Convention on Bills of Exchange and Promissory Notes; Bills of Exchange Act.
C) Convention on Bills of Exchange and Promissory Notes; Bills of Exchange Act; Uniform Commercial Code.
D) Uniform Commercial Code; Bills of Exchange Act; Convention on Bills of Exchange and Promissory Notes.

Question 28

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.

Question 29

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:

A) an irrevocable credit.
B) a revolving credit.
C) standby credit.
D) transferable credit.

Question 30

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:

A) issuing bank.
B) negotiating bank.
C) advising bank.
D) lading bank.

Question 31

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

A) sight draft.
B) time draft.
C) trade acceptance.
D) all of these are correct.

Question 32

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

A) The Federal Reserve Bank
B) The Eximbank
C) The Commodity Credit Corporation
D) The Agency for International Development

Question 33

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:

A) the drawer and the drawee.
B) the drawer and the payee.
C) the drawee and the payee.
D) the seller is only the drawer.

Question 34

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?

A) As long as the documents strictly comply with the letter of credit requirements, the bank will not have to reimburse the buyer.
B) If there is fraud in the transaction, the bank will have to reimburse the buyer and seek its remedies against the seller.
C) The strict compliance principle insulates the bank from liability, since it assures the bank that the underlying contract between the buyer and seller is entirely independent from the letter of credit contract.
D) As long as the documents strictly comply with the letter of credit requirements, the bank will not have to reimburse the buyer and the strict compliance principle insulates the bank from liability, since it assures the bank that the underlying contract between the buyer and seller is entirely independent from the letter of credit contract.

Question 35

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

A) confirmed letter of credit.
B) irrevocable letter of credit.
C) letter of credit with stipulations.
D) standby letter of credit.

Question 36

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:

A) good faith rule.
B) reasonable compliance rule.
C) strict compliance rule.
D) holder in due course rule.

Question 37

A letter of credit is a contract between:

A) the seller and the buyer's bank.
B) the buyer's bank and the seller's bank.
C) the sellers and their own bank.
D) the buyers and their own bank.

Question 38

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

A) resubmit the draft.
B) void the transaction.
C) refuse delivery.
D) refuse to pay against documents.

Question 39

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 _____

A) drawee; drawer; sight draft.
B) drawer; drawee; sight draft.
C) drawee; drawer; documents against acceptance.
D) drawer; drawee; cash against documents.

Question 40

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

A) trade acceptance.
B) banker's acceptance.
C) letter of credit.
D) none of these are correct.

Question 41

Under the UCP,the description of the goods in the commercial invoice must correspond with the description in the credit.In all other documents,the goods may be described _____

A) in perfect conformance with the credit.
B) in general terms not inconsistent with the description of the goods in the credit.
C) in specific terms as requested by the buyer.
D) in general terms consistent with the contract for the sale of goods.

Question 42

Assume that DownPillow sells pillows to a Japanese buyer and forwards documents and a draft for acceptance.Assume also that DownPillow discounts the trade acceptance to a U.S.bank,which then discounts the instrument in the credit markets.If the pillows turn out to be moldy and worthless,which of the following statement(s)is (are)true?

A) The Japanese buyer does not have to pay because the pillows are damaged.
B) The U.S. bank must reimburse whoever bought the instrument and can bring a lawsuit for payment against DownPillow.
C) The Japanese buyer must still honor and pay the acceptance upon presentation.
D) The Japanese buyer does not have to pay because the pillows are damaged and the U.S. bank must reimburse whoever bought the instrument and can bring a lawsuit for payment against DownPillow.
E) All of these are correct.

Question 43

Seller receives a letter of credit from a foreign buyer covering "1,000 standard-sized bed pillows." Seller's export manager completes an invoice for "1,000 bed pillows,size 20 by 26 inches" (this is the internationally accepted standard size for pillows).Which of the following is false?

A) If the issuing bank accepts or pays against documents, it will be liable to the account party.
B) The issuing bank must accept or pay against documents because 20 by 26 is standard and the goods conform to the contract.
C) The issuing bank may refuse to accept or to pay the draft upon presentation of the invoice.
D) If the buyer waives the defect in the invoice, the bank must accept or pay the draft.

Question 44

Compare and contrast the holdings pertaining to fraud in Sztejn and United City Merchants.

Question 45

Which of the following is (are)true concerning the UCP?

A) The UCP is a standardized set of rules in virtually all nations.
B) Because the UCP was drafted by the ICC and is recognized in most states, it automatically governs international letters of credit.
C) The UCP will govern a letter of credit only if its provisions are incorporated into the letter of credit by reference.
D) None of these are correct.

Question 46

The buyer in a letter of credit transaction is called the:

A) account Party.
B) beneficiary.
C) exporter.
D) issuer.

Question 47

A holder in due course,as defined by the UCC,includes which of the following? A holder in due course:

A) must have given a "just price" as consideration for the document or instrument.
B) must be unrelated to the original document holder.
C) must have taken the instrument for value and without notice it is overdue or has been dishonored.
D) A and C only.
E) none of these are correct.

Question 48

Most documentary discrepancies that occur in a letter of credit transaction are:

A) a result of fraud and misrepresentation.
B) a result of the desire to profit from the transaction.
C) a result of incomplete or inconsistent information.
D) banking errors.

Question 49

Compare and contrast O'Meara with Sztejn.

Question 50

The U.S.government agency that provides guarantees on loans or credit terms made by U.S.commercial banks or U.S.exporters to foreign buyers of U.S.made merchandise called:

A) The World Bank.
B) Eximbank.
C) Commodity Credit Corporation.
D) The Foreign Credit Insurance Association.

Question 51

The seller in a letter of credit transaction is called the:

A) account Party.
B) beneficiary.
C) importer.
D) issuer.

Question 52

The risk of loss due to the default of the buyer based on his or her inability to pay is known as:

A) commercial risk.
B) compensatory risk.
C) default risk.
D) currency risk.

Question 53

Compare and contrast the liabilities of a confirming bank and an issuing bank on a letter of credit.

Question 54

Describe the benefits and risks of banker's acceptance financing and accounts receivable financing.Under which form of financing will a bank be liable for defective goods?

Question 55

If a U.S.exporter is concerned about political and economic stability in the buyer's country,the exporter should request which of the following payment terms:

A) cash against documents.
B) irrevocable letter of credit.
C) confirmed letter of credit.
D) open account terms.

Question 56

As a seller to a foreign market,assess whether you would prefer to use a documentary sale than a sale on open account terms.

Question 57

Compare and contrast the documentary letter of credit with the standby letter of credit.

Question 58

The type of credit that allows the use of one credit instead of many to be used with the maximum amount available during a certain period of time is called:

A) a revolving credit.
B) an irrevocable credit.
C) a standby credit.
D) a transferable credit.

Question 59

The U.S.Export-Import Bank is the largest U.S.export financing agency that can provide:

A) financing through the World Bank.
B) financing for imports by U.S. firms.
C) guarantees on loans made by commercial banks.
D) all of these are correct.

Question 60

A holder of a negotiable instrument cannot claim to be a holder in due course if (s)he:

A) possesses a negotiable instrument.
B) knows the instrument is overdue.
C) unknowingly holds an instrument with a forged signature.
D) takes the instrument free from disputes between the drawer and drawee.

Question 61

Global MegaBank (GMB)issued an irrevocable letter of credit on behalf of its customer Beer Importers of America,Inc.(BIA)for up to $150,000 covering shipments of "Belgian Trappist Ales" from "Beer of the World Distributor" (BWD).BWD subsequently presented its draft and commercial invoice with its name properly spelled as "Beers of the World Distributor." The submitted documents also referred to the shipment of "Belgian Abbey Ales" although the shipments themselves were of "Belgian Trappist Ales." GMB refused to accept these documents because of these discrepancies.GMB noted that use of the name "Trappist" is limited by Belgian law to 6 breweries operated by monastic orders in Belgium.By contrast,abbey ales are brewed by non-monastic entities under licenses to use the names of monasteries or religious icons in their titles.BWD claimed that GMB wrongfully dishonored the documents.BWD claimed the difference in names was excusable as a minor typographical error and that abbey and trappist ales are brewed in the same manner and thus so closely resemble one another as to excuse the discrepancy between the letter of credit and documents.??Who would prevail in litigation between GMB and BWD? Please explain your answer.Would the result be different if the court was to apply UCP 600 or the functional standard of compliance? Why or why not?

Question 62

Draft a letter of credit compliant with the standards of the UCP.

Question 63

How are a red clause and a revolving letter of credit similar as compared to a red clause and a back-to-back letter of credit?

Question 64

Draft a specialized letter of credit,recalling some of the uses noted in the text.

Question 65

Draft a letter of credit.