What Is the Purpose of a Letter of Credit

question 92

Multiple Choice

What is the purpose of a letter of credit?

• A) It states that the bank will pay a specified sum of money to a beneficiary on presentation of particular, specified documents.
• B) It is a document written by an exporter instructing an importer to pay a specified amount of money at a specified time.
• C) It serves as a receipt, a contract, and a document of title.
• D) It indicates that the carrier has received the merchandise described on the face of the document.
• E) It allows buyers to obtain possession of merchandise without signing a formal document acknowledging his or her obligation to pay.

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Definitions:

IRR

Internal Rate of Return; a financial metric used to evaluate the profitability of investments, representing the discount rate that makes the net present value (NPV) of all cash flows equal to zero.

Net Cash Flows

The difference between a company's cash inflows and outflows during a specific period, representing its ability to generate value.

Depreciation

The accounting entry allocating the cost of a long-lived asset against income over the asset’s life. Depreciation is a noncash charge, so net income is generally less than true cash flow by at least the amount of depreciation.

Opportunity Costs

The cost of foregoing the next best alternative when making a decision.