review-403 term test 2

review-403 term test 2 - 403 term test 2 1. The application...

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403 term test 2 1. “The application of the concept of payment for non-performance is the bedrock of the standby credit’. Elaborate the concept and discuss the main characteristics of standby credits. Standby L/C —is “issued to support payment, when due or after default, of obligations based on money loaned or advanced, or upon the occurrence or non-occurrence of another contingency”. Thus a standby is intended to cover a non-performance (default) situation than a performance situation. Features: 1) Banks may issue standbys based on UCP 600 or ISP98. 2) Concept of payment for non performance. 3) Regular settlement is non L/C. 4) Standby acts as a guarantee for payment, used only if the regular arrangement fails. 5) Usually valid for a year. 6) Evergreen clause for automatic renewal. 2. “The application of the concept of payment for non performance is the bedrock of standby letter of credit ”. Analyze the statement and briefly explain how standby works in a commercial relationship. How a standby works? 1) In reality in international trade the standby credit arrangement works only between trusted trading partners ie. only after a couple of successful transaction using either advance payment method or regular L/C settlement. 2) The exporter and importer negotiate a sales arrangement that substitutes a standby letter of credit for commercial letter of credit, at an amount equal to an agreed credit limit for the buyer. 3) In the event the buyer fails to pay in a timely manner on the open credit sales, the exporter can draw on the standby letter of credit. 4) The buyer must have absolute trust in the seller as the seller can make a claim for payment to the bank even when the payment was made under other settlement method agreed. 3. Types of standby 1) Advance Payment standby- Supports an obligation to account for an advance payment made by the beneficiary to the applicant. 2) Bid Bond/ Tender Bond Standby-Supports an obligation of the applicant to execute a contract if the applicant is awarded a bid. 3) Commercial Standby- Supports the obligations of an applicant to pay for goods or services in the event of payment by other methods. 4) Financial Standby- Supports an obligation to pay money, including any instrument evidencing an obligation to repay borrowed money. 4. What are advantages of revolving L/C? (Compare and contrast L/Cs revolving in relation to time and L/Cs revolving in relation to value.) A revolving Letter of Credit is a documentary letter of credit that by its nature eliminates the costly practice of requiring issuance of a separate letter of credit for each recurring transaction between a buyer
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This note was uploaded on 08/16/2011 for the course ITS 403 taught by Professor Dz during the Spring '10 term at Seneca.

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review-403 term test 2 - 403 term test 2 1. The application...

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