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CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based

A company buys machinery from a foreign supplier and agrees to pay the price in annual instalments over five years. The supplier insists that the company's bank undertake to pay each instalment if the company fails to do so. This bank undertaking is best described as a:

It is a deferred payment guarantee. The bank assures the supplier that the instalments of the machinery price, payable over several years, will be paid if the buyer defaults. Bid bonds and performance guarantees support tenders and contract execution, not instalment purchases of assets.

  1. ADeferred payment guaranteeCorrect
  2. BBid bond
  3. CPerformance guarantee
  4. DLetter of comfort given by the promoter

Explanation

A deferred payment guarantee is issued by a bank to the seller of an asset, assuring that instalments of the purchase price payable over time will be paid if the buyer defaults. A bid bond supports a tender offer and a performance guarantee supports execution of a contract; neither relates to instalment purchase of assets.

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