CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based
A contractor, Sharma Constructions, is awarded a road project by a state agency. The agency asks for assurance that if the contractor fails to perform, it will be compensated up to a stated sum. The contractor's bank gives a written undertaking to pay the agency on demand. This instrument is best described as a:
This is a performance bank guarantee. The bank gives a written undertaking to pay the beneficiary if the contractor fails to perform. It is a non-fund based facility because the bank lends no money at issue and pays only if the guarantee is invoked.
- APerformance bank guaranteeCorrect
- BBill of exchange discounted by the bank
- CTerm loan sanctioned to the contractor
- DCash credit limit against stock
Explanation
A performance guarantee is a non-fund based facility where the bank undertakes to pay the beneficiary if the customer defaults in performing a contract. No funds move to the contractor at issue. A term loan or cash credit would involve actual lending, and a discounted bill is fund based.
Did you get it right without looking?
One question tells you little. A timed set on Raising of Funds - Non Fund Based shows your real accuracy, how long you take and where you lose marks.
More Raising of Funds - Non Fund Based questions
- A contractor gives the government a bank guarantee in place of a cash security deposit for a road project. Which type of bank guarantee is t…
- A company's bank guarantee is invoked by a beneficiary and the bank pays it, though the company has not reimbursed the bank. For the bank, t…
- Which of the following is the main reason a bank looks at the external credit rating of a borrower while fixing non-fund based limits?
- Which feature distinguishes forfaiting from ordinary domestic invoice factoring?
- Under an unconditional (on demand) bank guarantee, the beneficiary invokes the guarantee while the applicant claims that the underlying cont…
- Which feature distinguishes a letter of credit from a bank guarantee as a non-fund based instrument used by a company?