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

Which feature distinguishes a standby letter of credit from a commercial documentary letter of credit?

A standby letter of credit is drawn upon only if the applicant defaults on its obligation, so it works as a guarantee-like back-up. A commercial letter of credit is the normal payment mechanism, paid against shipping documents when the goods are dispatched.

  1. AIt is drawn upon only if the applicant fails to perform an obligation, functioning like a guaranteeCorrect
  2. BIt is always payable immediately against shipping documents
  3. CIt can only be issued by a central bank
  4. DIt transfers title to goods to the issuing bank on opening

Explanation

A standby credit is a back-up instrument that is drawn on only when the applicant defaults on a payment or performance obligation, so it works much like a bank guarantee. A commercial credit, by contrast, is the expected primary payment route against shipping documents. Neither type is restricted to central banks or gives the bank title on opening.

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