Chapter 19: Financing International Trade

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Chapter 19
Financing International Trade
1. Which of the following is a reason why commercial banks can facilitate international trade?
A) the exporter may not wish to accept credit risk of the importer.
B) the government may impose exchange contracts that prevent payment by the importer to the
exporter.
C) the exporter may need financing until payment for the goods is received.
D) all of these.
ANSWER: D
2. Consider an exporter that sells its accounts receivables off to another firm that becomes responsible
for obtaining cash from the various importers. This reflects:
A) accounts receivable financing.
B) consignment.
C) factoring.
D) a letter of credit.
ANSWER: C
3. Consider a bank that acknowledges that it will make payments on behalf of a beer importer after the
beer is delivered to the importer. This reflects:
A) accounts receivable financing.
B) forfaiting.
C) factoring.
D) a letter of credit.
ANSWER: D
4. Consider an importer that issues a promissory note to pay for the imported capital goods over a
period of five years. The notes are extended to an exporter who sells them at a discount to a bank.
This reflects:
A) accounts receivable financing.
B) forfaiting.
C) factoring.
D) a letter of credit.
ANSWER: B

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5. Consider an exporter that is willing to send goods to the importer without a guaranteed payment by
the bank. The bank provides a loan to the exporter that is backed by the value of the exported
goods. This reflects:
A) accounts receivable financing.
B) forfaiting.
C) factoring.
D) a letter of credit.
ANSWER: A
6.
A)
B)
C)
D)

MNCs can use _______ to sell their existing accounts receivable as a means of obtaining cash.
factoring
a bill of lading
a bankers acceptance
a letter of credit

ANSWER: A
7. The _______ was established in 1934 with the intention to facilitate Soviet-American trade.
A) Domestic International Sales Corporation (DISC)
B) Private Export Funding Corporation (PEFCO)
C) Export-Import Bank
D) Foreign Credit Insurance Association (FCIA)
ANSWER: C
8. A _______ provides a summary of freight charges and conveys title to the merchandise.
A) letter of credit
B) bankers acceptance
C) bill of lading
D) bill of exchange
ANSWER: C
9. According to the text, international trade activity has generally _______ over time. This should
cause the popularity of trade finance techniques to _______ over time.
A) increased; increase
B) increased; decrease
C) decreased; increase
D) decreased; decrease
ANSWER: A

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10. Which of the following payment terms provides the supplier with the greatest degree of protection?
A) letters of credit.
B) consignment.
C) prepayment.
D) drafts (sight/time).
ANSWER: C
11. With a(n) _______, the exporter ships the goods to the importer while still retaining actual title to
the merchandise.
A) letter of credit arrangement
B) open account arrangement
C) draft arrangement
D) consignment arrangement
ANSWER: D
12. With _______, a bank purchases a receivable without recourse to the exporter.
A) accounts receivable financing
B) factoring
C) a bankers acceptance
D) a letter of credit
ANSWER: B
13. In _______, a bank arranges to fund a loan to pay the exporter instead of charging the importers
account immediately.
A) refinancing of a sight letter of credit
B) a bankers acceptance
C) a short-term bank loan
D) accounts receivable financing
ANSWER: A
14. A bill of exchange requesting the bank to pay the face amount upon presentation of documents is a:
A) bankers acceptance.
B) time draft.
C) letter of credit.
D) sight draft.
ANSWER: D

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15. A bill of exchange requesting the bank to pay the face amount at a future date is a:
A) bankers acceptance.
B) time draft.
C) letter of credit.
D) sight draft.
ANSWER: B
16. An exchange of goods between two parties under two distinct contracts expressed in monetary terms
is known as:
A) compensation.
B) counterpurchase.
C) factoring.
D) accounts receivable financing.
ANSWER: B
17. Which of the following is not a program of the Export-Import Bank of the U.S.?
A) working capital guarantee program.
B) project finance loan program.
C) direct loan program.
D) the foreign sales corporation program.
ANSWER: D
18. Who bears the payment risk in a letter of credit?
A) the exporter.
B) the importer.
C) the issuing bank.
D) both the exporter and importer.
ANSWER: C
19. Countertrade represents foreign trade:
A) restrictions imposed by the government on imports from another country.
B) restrictions imposed by the government on exports sent from the country.
C) transactions that force the sales of goods of one country to be linked to the purchase or
exchange of goods from the country.
D) financing provided to an exporter in exchange for goods provided to the creditor by the
exporter.
ANSWER: C
20. The Direct Loan Program is administered by the:
A) Private Export Funding Corporation (PEFCO).
B) Overseas Private Investment Corporation (OPIC).
C) Ex-Imbank.
D) Foreign Credit Insurance Association (FCIA).
ANSWER: C

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21. The Working Capital Guarantee Program is administered by the:

A) Private Export Funding Corporation (PEFCO).
B) Overseas Private Investment Corporation (OPIC).
C) Ex-Imbank.
D) Foreign Credit Insurance Association (FCIA).
ANSWER: C
22.
A)
B)
C)
D)
E)

Which of the following is not a payment method used for international trade?
consignment.
open account.
factoring.
draft.
letter of credit.

ANSWER: C
23.

Under a letter of credit arrangement, the bank issuing the letter of credit is known as the
_______ bank, the correspondent bank in the beneficiarys country to which the issuing bank sends
the letter of credit is known as the _______ bank, and the bank that agrees to examine documents
under the letter of credit and pay the beneficiary is called the _______ bank.
A) issuing; negotiating; advising
B) issuing; advising; negotiating
C) advising; issuing; negotiating
D) negotiating; issuing; advising
E) advising; negotiating; issuing
ANSWER: B

24.
A)
B)
C)
D)
E)

A(n) _______ letter of credit is not a trade-related letter of credit.

commercial
import/export
revocable
irrevocable
All of these are trade-related letters of credit.

ANSWER: E
25.

Which of the following is not true regarding letters of credit?

A) They are issued by banks on behalf of the importer promising to pay the exporter.
B) A revocable letter of credit can be cancelled or revoked at any time without prior notification to
the beneficiary.
C) They guarantee that the goods shipped are the goods purchased.
D) All of these are true.
ANSWER: C

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26.
A)
B)
C)
D)

A bankers acceptance is a draft drawn on and accepted by a(n):

bank.
importer.
exporter.
none of these.

ANSWER: A
27.
A)
B)
C)
D)
E)

Which of the following is not true regarding a bankers acceptance?

It can be beneficial to the exporter, as he does not have to worry about the credit risk of the
importer.
It can be beneficial to the importer, as he may have greater access to foreign markets when
purchasing supplies.
It can be beneficial to the bank accepting the draft in that it earns a commission for creating an
acceptance.
It is a sight draft.
All of these are true.

ANSWER: D
28.
A)
B)
C)
D)

_______ is not a type of program offered by Ex-Imbank.

Guarantees
Loans
Currency swap insurance
Bank insurance

ANSWER: C
29.

As part of Ex-Imbanks export credit insurance programs, a(n) _______ policy is generally
issued to an administrator, such as a bank, trading company, insurance broker, or government
agency, who then administers the policy for multiple exporters.
A) multiple-buyer
B) single-buyer
C) small business
D) umbrella
ANSWER: D

30.

The _______ is a private corporation owned by a consortium of commercial banks and

industrial companies, but the _______ is a self-sustaining government agency.
A) Overseas Private Investment Corporation (OPIC); Private Export Funding Corporation
(PEFCO)
B) Private Export Funding Corporation (PEFCO); Overseas Private Investment Corporation
(OPIC)
C) Private Export Funding Corporation (PEFCO); Ex-Imbank
D) Overseas Private Investment Corporation (OPIC); Ex-Imbank
ANSWER: B

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31.
A)
B)
C)
D)

99

The risk to the exporter is highest with the _______ method.

prepayment
letter of credit
consignment
open account

ANSWER: D
32.

A(n) _______ is an unconditional promise drawn by one party, instructing the buyer to pay the
face amount upon presentation.
A) draft
B) bill of lading
C) trade acceptance
D) letter of credit
ANSWER: A

33.

Under a(n) _______ arrangement, the exporter ships the goods to the importer while still
retaining actual title to the merchandise.
A) draft
B) consignment
C) prepayment
D) open account
ANSWER: B

34.
A)
B)
C)
D)

In _______, the exporter sells accounts receivable without recourse.

accounts receivable financing
factoring
working capital financing
countertrade

ANSWER: B
35.
A)
B)
C)
D)

_______ promises to pay the beneficiary if they buyer fails to pay as agreed.
A standby L/C
A transferable L/C
Assignment of proceeds
None of these

ANSWER: A
36.

_______ refers to the purchase of financial obligations, such as bills of exchange or promissory
notes, without recourse to the original holder, usually the exporter.
A) Factoring
B) Accounts receivable financing
C) Forfaiting
D) None of these
ANSWER: C

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International Financial Management

The Working Capital Guarantee Program and the Medium-term Guarantee Program are offered
by the:
A) Export-Import Bank of the United States.
B) Private Export Funding Corporation.
C) Overseas Private Investment Corporation.
D) none of these.
ANSWER: A

38.

The _______ is a self-sustaining federal agency responsible for insuring direct U.S. investments
in foreign countries against the risk of currency inconvertibility, expropriation, and other political
risks.
A)
Export-Import Bank of the United States
B)
Private Export Funding Corporation
C)
Overseas Private Investment Corporation
D)
none of these
ANSWER: C

39. The all-in-rate a bank charges its customer(s) for accepting drafts includes both the discount rate
and the acceptance commission.
A) true.
B) false.
ANSWER: A
40. All types of foreign trade transactions in which the sale of goods to one country is linked to the
purchase or exchange of goods from that same country are called countertrade.
A) true.
B) false.
ANSWER: A
41.

The exchange of goods between two parties without the use of any currency as a
medium of exchange is called factoring.
A) true.
B) false.
ANSWER: B

42. A draft drawn on and accepted by a bank is called a bankers acceptance.

A) true.
B) false.
ANSWER: A

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43.

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Under a letter of credit, the exporter will not ship the goods until the buyer has remitted
payment to the exporter.
A) true.
B) false.
ANSWER: B

44.

An irrevocable L/C obligates the issuing bank to honor all drawings presented in
conformity with the terms of the L/C.
A) true.
B) false.
ANSWER: A

45.

The interest rate the bank charges the customer in a bankers acceptance is referred to
as the all-in rate; it entirely consists of the acceptance commission.
A) true.
B) false.
ANSWER: B

46.

The term counterpurchase denotes the exchange of goods between two parties under
two distinct contracts expressed in monetary terms.
A) true.
B) false.
ANSWER: A

47.

In an open account transaction, the exporter ships the goods to the importer but retains
title to the goods until they have been sold.
A) true.
B) false.
ANSWER: B

48.

When using factoring to finance international trade, a bank will provide a loan to the
exporter secured by an assignment of the account receivable.
A) true.
B) false.
ANSWER: B

49.

From a banks viewpoint, issuing a letter of credit is analogous to making a loan as far
as risk is concerned.
A) true.
B) false.
ANSWER: A

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50.

There is an active secondary market for bankers acceptances.

A) true.
B) false.
ANSWER: A

51.

The commission earned by the bank for accepting a draft is reflected in the all-in-rate.
A) true.
B) false.
ANSWER: A

52.

The Working Capital Guarantee Program of the Private Export Funding Corporation
(PEFCO) encourages commercial banks to extend short-term export financing to eligible exporters
by providing a comprehensive guarantee that covers 100 percent of the loans principal and interest.
A) true.
B) false.
ANSWER: B

53.

The objectives of the Export-Import Bank of the United States include the assumption
of underlying credit risk and country risk to encourage private lenders to finance export trade and
the provision of direct loans to foreign buyers when private lenders are unwilling to do so.
A) true.
B) false.
ANSWER: A

54.

The Overseas Private Investment Corporation (OPIC) is owned by a consortium of

commercial banks and industrial companies; it cooperates closely with the Export-Import Bank.
A) true.
B) false.
ANSWER: B

55.

Under prepayment, the exporter will not ship the goods until the buyer has remitted
payment to the exporter.
A) true.
B) false.
ANSWER: A

56.

A letter of credit does not guarantee that the goods purchased will be those invoiced and
shipped.
A) true.
B) false.
ANSWER: A

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57.

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If shipment is made under a forfaiting draft, the exporter is paid once shipment has
been made and the draft is presented to the buyer for payments.
A) true.
B) false.
ANSWER: B

58.

In a countertrade transaction, banks on both ends act as intermediaries in the

processing of shipping documents and the collection of payment.
A) true.
B) false.
ANSWER: B

59.

Under a countertrade arrangement, the exporter ships the goods to the importer while
retaining title to the merchandise until it is sold.
A) true.
B) false.
ANSWER: B

60.

The sale of accounts receivable to a third party for a discount is called factoring.
A) true.
B) false.
ANSWER: A