Question : ___________ is a document issued by a bank that guarantees the payment of a specific amount of money to a specified person or entity.
Option 1: Bank guarantee
Option 2: Letter of credit
Option 3: Promissory note
Option 4: Demand draft
Correct Answer: Letter of credit
Solution : The correct answer is (b) Letter of credit
A letter of credit is a document issued by a bank on behalf of a buyer, commonly known as the applicant, to guarantee the payment to a specified person or entity, usually the seller or beneficiary. It serves as a commitment from the issuing bank to pay a specified amount of money to the beneficiary upon the fulfillment of certain conditions stated in the letter of credit.
The letter of credit minimizes the risk for both the buyer and seller in a transaction. For the seller, it provides assurance of payment, while for the buyer, it ensures that payment will only be made upon satisfactory fulfillment of the specified conditions.
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