36. The rule that usually prevails for interpreting documents that are submitted to a bank for payment under a letter of
credit is commonly called the:
a. Good faith rule.
b. Reasonable compliance rule.
c. Strict compliance rule.
d. Holder in due course rule.
37. In the event that a discrepancy is found in the documents presented under a letter of credit, the bank may request a
waiver or:
a. Resubmit the draft.
b. Void the transaction.
c. Refuse delivery.
d. Refuse to pay against documents.
38. The issuing bank is required to pay on documents in case of , but not in the event of:
a. Fraud; breach of warranty.
b. Delivery of the goods; non-delivery of the goods.
c. Breach of warranty; fraud.
d. Issuing banks are not the paying banks.
39. When the Seller’s bank guarantees payment under the letter of credit issued by buyer’s bank it becomes a(n):
a. Confirmed Letter of Credit.
b. Irrevocable Letter of Credit.
c. Letter of Credit with Stipulations.
d. Standby Letter of Credit.
40. The type of letter of credit issued to guarantee that a party will fulfill its obligations under a service, construction, or
sales contract is called:
a. An Irrevocable Letter of Credit.
b. Standby Letter of Credit.
c. Letter of Warranty Credit.
d. Confirmed Letter of Credit.
41. The type of letter of credit that can be split up between many suppliers, each able to present their own documents
for payment and allowing the trader to take his profits from the balance of the credit, is called:
a. An irrevocable credit.
b. A revolving credit.
c. Standby credit.
d. Transferable credit.
42. The type of credit that allows the use of one credit instead of many to be used with the maximum amount available
during a certain period of time is called:
a. A revolving credit.
b. An irrevocable credit.
c. A standby credit.
d. A transferable credit.
43. The U.S. Export-Import Bank is the largest U.S. export financing agency that can provide:
a. Financing through the World Bank.
b. Financing for imports by U.S. firms.
c. Guarantees on loans made by commercial banks.
d. All of the above.
44. The risk of loss due to the default of the buyer based on his or her inability to pay is known as:
a. Commercial risk.
b. Compensatory risk.
c. Default risk.
d. Currency risk.
45. Under the UCP, the description of the goods in the commercial invoice must correspond with the description in the
credit. In all other documents, the goods may be described :
a. In perfect conformance with the credit.
b. In general terms not inconsistent with the description of the goods in the credit.
c. In specific terms as requested by the buyer.
d. In general terms consistent with the contract for the sale of goods.
46. If a U.S. exporter is concerned about political and economic stability in the buyer‘s country, the exporter should
request which of the following payment terms:
a. Cash against documents.
b. Irrevocable letter of credit.
c. Confirmed letter of credit.
d. Open account terms.
47. The U.S. government agency that provides guarantees on loans or credit terms made by U.S. commercial banks or
U.S. exporters to foreign buyers of U.S. made merchandise is called:
a. The World Bank.
b. Eximbank.
c. Commodity Credit Corporation.
d. The Foreign Credit Insurance Association.
48. The buyer in a letter of credit transaction is called the:
a. Account Party.
b. Beneficiary.
c. Exporter.
d. Issuer.
49. The seller in a letter of credit transaction is called the:
a. Account Party.
b. Beneficiary.
c. Importer.
d. Issuer.
50. Most documentary discrepancies that occur in a letter of credit transaction are:
a. A result of fraud and misrepresentation.
b. A result of the desire to profit from the transaction.
c. A result of incomplete or inconsistent information.
d. Banking errors.
51. A holder in due course, as defined by the UCC, includes which of the following? A holder in due course:
a. Must have given a “just price” as consideration for the document or instrument.
b. Must be unrelated to the original document holder.
c. Must have taken the instrument for value and without notice it is overdue or has been dishonored.
d. A and C only.
e. None of the above.
52. Assume that DownPillow sells pillows to a Japanese buyer and forwards documents and a draft for acceptance.
Assume also that DownPillow discounts the trade acceptance to a U.S. bank, which then discounts the instrument in
the credit markets. If the pillows turn out to be moldy and worthless, which of the following statement(s) is (are)
true?
a. The Japanese buyer does not have to pay because the pillows are damaged.
b. The U.S. bank must reimburse whoever bought the instrument and can bring a lawsuit for payment against
DownPillow.
c. The Japanese buyer must still honor and pay the acceptance upon presentation.
d. A and B.
e. All of the above.
53. A holder of a negotiable instrument cannot claim to be a holder in due course if (s)he:
a. Possesses a negotiable instrument.
b. Knows the instrument is overdue.
c. Unknowingly holds an instrument with a forged signature.
d. Takes the instrument free from disputes between the drawer and drawee.
54. Which of the following is (are) true concerning the UCP?
a. The UCP is a standardized set of rules in virtually all nations.
b. Because the UCP was drafted by the ICC and is recognized in most states, it automatically governs
international letters of credit.
c. The UCP will govern a letter of credit only if its provisions are incorporated into the letter of credit by
reference.
d. A and C only.
e. A and B only.
55. Seller receives a letter of credit from a foreign buyer covering “1,000 standard-sized bed pillows.” Seller’s export
manager completes an invoice for “1,000 bed pillows, size 20 by 26 inches” (this is the internationally accepted
standard size for pillows). Which of the following is false:
a. If the issuing bank accepts or pays against documents, it will be liable to the account party.
b. The issuing bank must accept or pay against documents because 20 by 26 is standard and the goods conform
to the contract.
c. The issuing bank may refuse to accept or to pay the draft upon presentation of the invoice.
d. If the buyer waives the defect in the invoice, the bank must accept or pay the draft.
56. Compare and contrast the holdings pertaining to fraud in Sztejn and United City Merchants.
57. Compare and contrast O’Meara with Sztejn.
58. As a seller to a foreign market, assess whether you would prefer to use a documentary sale than a sale on open
account terms.
59. Compare and contrast the documentary letter of credit with the standby letter of credit.
60. Describe the benefits and risks of banker’s acceptance financing and accounts receivable financing. Under which
form of financing will a bank be liable for defective goods?
61. Compare and contrast the liabilities of a confirming bank and an issuing bank on a letter of credit.
62. How are a red clause and a revolving letter of credit similar as compared to a red clause and a back-to–back letter
of credit?
63. Draft a letter of credit.
64. Draft a specialized letter of credit, recalling some of the uses noted in the text.
65. Draft a letter of credit compliant with the standards of the UCP.
66. Global MegaBank (GMB) issued an irrevocable letter of credit on behalf of its customer Beer Importers of America,
Inc. (BIA) for up to $150,000 covering shipments of “Belgian Trappist Ales” from “Beer of the World Distributor”
(BWD). BWD subsequently presented its draft and commercial invoice with its name properly spelled as “Beers of
the World Distributor.” The submitted documents also referred to the shipment of “Belgian Abbey Ales” although the
shipments themselves were of “Belgian Trappist Ales.” GMB refused to accept these documents because of these
discrepancies. GMB noted that use of the name “Trappist” is limited by Belgian law to 6 breweries operated by
monastic orders in Belgium. By contrast, abbey ales are brewed by non-monastic entities under licenses to use the
names of monasteries or religious icons in their titles. BWD claimed that GMB wrongfully dishonored the
documents. BWD claimed the difference in names was excusable as a minor typographical error and that abbey and
trappist ales are brewed in the same manner and thus so closely resemble one another as to excuse the discrepancy
between the letter of credit and documents.
Who would prevail in litigation between GMB and BWD? Please explain your answer. Would the result be different
if the court was to apply UCP 600 or the functional standard of compliance? Why or why not?