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 the above

ANS: D PTS: 1

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.

ANS: C PTS: 1

3. Consider a bank that acknowledges that it will make payments on behalf of a computer importer after the
computers are delivered to the importer. This reflects:
a. accounts receivable financing.
b. forfaiting.
c. factoring.
d. a letter of credit.

ANS: D PTS: 1

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.

ANS: B PTS: 1

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.

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 d. a letter of credit.

ANS: A PTS: 1

6. 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

ANS: T PTS: 1

7. MNCs can use ____ to sell their existing accounts receivable as a means of obtaining cash.
a. factoring
b. a bill of lading
c. a banker's acceptance
d. a letter of credit

ANS: A PTS: 1

8. 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)

ANS: C PTS: 1

9. A ____ provides a summary of freight charges and conveys title to the merchandise.
a. letter of credit
b. banker's acceptance
c. bill of lading
d. bill of exchange

ANS: C PTS: 1

10. 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

ANS: A PTS: 1

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
11. 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).

ANS: C PTS: 1

12. With ____, the exporter ships the goods to the importer while still retaining actual title to the
merchandise.
a. a letter of credit arrangement
b. an open account arrangement
c. a draft arrangement
d. a consignment arrangement

ANS: D PTS: 1

13. With ____, a bank purchases a receivable without recourse to the exporter.
a. accounts receivable financing
b. factoring
c. a banker's acceptance
d. a letter of credit

ANS: B PTS: 1

14. In ____, a bank arranges to fund a loan to pay the exporter instead of charging the importer's account
immediately.
a. refinancing of a sight letter of credit
b. a banker's acceptance
c. a short-term bank loan
d. accounts receivable financing

ANS: A PTS: 1

15. A bill of exchange requesting the bank to pay the face amount upon presentation of documents is a:
a. banker's acceptance.
b. time draft.
c. letter of credit.
d. sight draft.

ANS: D PTS: 1

16. A bill of exchange requesting the bank to pay the face amount at a future date is a:
a. banker's acceptance.
© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 b. time draft.
c. letter of credit.
d. sight draft.

ANS: B PTS: 1

17. An exchange of goods between two parties under two distinct contracts expressed in monetary terms is:
a. compensation.
b. counterpurchase.
c. factoring.
d. accounts receivable financing.

ANS: B PTS: 1

18. 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.

ANS: D PTS: 1

19. 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.

ANS: C PTS: 1

20. 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.

ANS: C PTS: 1

21. 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
© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 ANS: T PTS: 1

22. 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

ANS: F PTS: 1

23. A draft drawn on and accepted by a bank is called a banker's acceptance.

a. True
b. False

ANS: T PTS: 1

24. 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).

ANS: C PTS: 1

25. 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).

ANS: C PTS: 1

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

ANS: C PTS: 1

27. Under a letter of credit arrangement, the bank issuing the letter of credit is known as the ____ bank, the
correspondent bank in the beneficiary's 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

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 b. issuing; advising; negotiating
c. advising; issuing; negotiating
d. negotiating; issuing; advising
e. advising; negotiating; issuing

ANS: B PTS: 1

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

a. commercial
b. import/export
c. revocable
d. irrevocable
e. all of the above are trade-related letters of credit

ANS: E PTS: 1

29. 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 the above are true.

ANS: C PTS: 1

30. A banker's acceptance is a draft drawn on and accepted by a(n) ____.

a. bank
b. importer
c. exporter
d. none of the above

ANS: A PTS: 1

31. Which of the following is not true regarding a banker's acceptance?

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

ANS: D PTS: 1
© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
32. ____ is not a type of program offered by Ex-Imbank.
a. Guarantees
b. Loans
c. Currency swap insurance
d. Bank insurance

ANS: C PTS: 1

33. As part of Ex-Imbank's export credit insurance programs, a(an) ____ 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

ANS: D PTS: 1

34. 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

ANS: B PTS: 1

35. The risk to the exporter is highest with the ____ method.
a. prepayment
b. letter of credit
c. consignment
d. open account

ANS: D PTS: 1

36. A ____ 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

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 ANS: A PTS: 1

37. 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

ANS: B PTS: 1

38. In ____, the exporter sells accounts receivable without recourse.

a. accounts receivable financing
b. factoring
c. working capital financing
d. countertrade

ANS: B PTS: 1

39. 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

ANS: T PTS: 1

40. ____ promises to pay the beneficiary if they buyer fails to pay as agreed.
a. A standby L/C
b. A transferable L/C
c. Assignment of proceeds
d. None of the above

ANS: A PTS: 1

41. The interest rate the bank charges the customer in a banker's acceptance is referred to as the all-in rate; it
entirely consists of the acceptance commission.
a. True
b. False

ANS: F PTS: 1

42. ____ 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

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 c. Forfaiting
d. None of the above

ANS: C PTS: 1

43. The term counterpurchase denotes the exchange of goods between two parties under two distinct contracts
expressed in monetary terms.
a. True
b. False

ANS: T PTS: 1

44. 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 the above

ANS: A PTS: 1

45. 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 the above

ANS: C PTS: 1

46. 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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 b. False

ANS: F PTS: 1

49. From a bank's viewpoint, issuing a letter of credit is analogous to making a loan as far as risk is
concerned.
a. True
b. False

ANS: T PTS: 1

50. There is an active secondary market for banker's acceptances.

a. True
b. False

ANS: T PTS: 1

51. The commission earned by the bank for accepting a draft is reflected in the all-in-rate.
a. True
b. False

ANS: T PTS: 1

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 loan's principal and interest.
a. True
b. False

ANS: F PTS: 1

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

ANS: T PTS: 1

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

ANS: F PTS: 1

55. Under prepayment, the exporter will not ship the goods until the buyer has remitted payment to the
exporter.
a. True
b. False

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 ANS: T PTS: 1

56. A letter of credit does not guarantee that the goods purchased will be those invoiced and shipped.
a. True
b. False

ANS: T PTS: 1

57. 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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

60. The sale of accounts receivable to a third party for a discount is called factoring.
a. True
b. False

ANS: T PTS: 1

61. 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

ANS: F PTS: 1

62. The payment method that affords the supplier the greatest degree of protection is the prepayment method.
a. True
b. False

ANS: T PTS: 1

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
63. A bank issuing a letter of credit on behalf of an importer is obligated to honor the letter of credit
regardless of the buyer's willingness or ability to pay.
a. True
b. False

ANS: T PTS: 1

64. If shipment is made under a time draft, the exporter is paid once shipment has been made and the draft is
presented to the buyer for payment.
a. True
b. False

ANS: F PTS: 1

65. 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

ANS: F PTS: 1

66. 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

ANS: F PTS: 1

67. An irrevocable letter of credit can be cancelled or amended if the beneficiary consents to it.
a. True
b. False

ANS: T PTS: 1

68. The bill of exchange serves as a receipt for shipment and a summary of freight charges; most importantly,
it conveys title to the merchandise.
a. True
b. False

ANS: F PTS: 1

69. Which of the following is not a payment method used for international trade?
a. Supplier credit
b. Bill of exchange
c. Bill of lading
d. Letter of credit
e. All of the above are payment methods used.

ANS: C PTS: 1
© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
70. Under a ____, the exporter is paid once shipment has been made and the draft is presented to the buyer for
payment; under a ____, the exporter provides instructions to the buyer's bank to release shipping
documents against acceptance, by the buyer, of the draft.
a. sight draft; time draft
b. sight draft; banker's acceptance
c. bill of lading; banker's acceptance
d. time draft; sight draft

ANS: A PTS: 1

71. Which of the following is not a trade financing method used in international trade from an exporter's
perspective?
a. Accounts receivable financing
b. Letter of credit
c. Barter
d. Open account

ANS: D PTS: 1

72. Of all the payment methods available in international trade, ____ probably affords the most protection to
the exporter, while ____ probably affords the least protection.
a. prepayment; consignment
b. prepayment; open account
c. open account; prepayment
d. consignment; prepayment

ANS: B PTS: 1

73. 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 the above are true.

ANS: C PTS: 1

© 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.