When Comparing a Letter of Credit and a Banker's Acceptance

question 300

Multiple Choice

When comparing a letter of credit and a banker's acceptance for financing international business transactions, a letter of credit

• A) provides payment anywhere in the world. A banker's acceptance pays in areas in which the bank has a branch.
• B) pays a specified amount if certain conditions are met. Conversely, a banker's acceptance represents an unconditional promise to pay.
• C) requires both the buyer and seller to deal in the same currencies. A banker's acceptance provides for currency exchange.
• D) provides financing directly between buyers and sellers in different countries. A banker's acceptance provides an arrangement in which a bank serves as a broker taking title to the goods.

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Definitions:

Entry Barriers

Refers to obstacles that prevent or hinder new competitors from easily entering an industry or area of business.

Long-run Equilibrium

Long-run equilibrium occurs when all producers in a market are producing at their minimum long-run average cost, and no new firms wish to enter or exit the market.

Average Cost

The total cost of production divided by the number of goods produced, also known as unit cost.

Marginal Cost

The increase in total cost that arises from an extra unit of production.