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

Which statement about a bank guarantee as a non-fund based facility is correct?

The bank's liability arises only if the guarantee is invoked on the applicant's default, and the bank charges a commission for issuing it. No cash is disbursed at issue, which is why it is called non-fund based.

  1. AThe bank disburses cash to the applicant when the guarantee is issued
  2. BThe bank's liability arises only if the guarantee is invoked on the applicant's default, though it charges a commission for issuing itCorrect
  3. CThe applicant pays no charge because no funds are lent
  4. DThe beneficiary must first obtain a court decree against the applicant before invoking it

Explanation

Non-fund based means no immediate outflow of funds by the bank; the bank earns a commission and pays only on invocation. Cash is not disbursed at issue, commission is charged, and an unconditional guarantee needs no prior decree.

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