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Difficulty: MediumForms and Instruments of Credit

Match each instrument of credit on the left with its correct defining feature or description on the right.

  • Bill of ExchangeAn unconditional written order issued by a seller requesting a buyer to pay a specified sum of money at a fixed future date.
  • Promissory NoteAn unconditional written promise made by a debtor to pay a specified sum of money to the creditor on demand or at a fixed date.
  • Letter of CreditA document issued by an importer's bank guaranteeing payment to an exporter upon presentation of specified shipping documents.
  • Bank DraftA cheque drawn by a commercial bank upon its own funds or another branch to guarantee payment to the payee.

Answer

Bill of Exchange matches the unconditional written order issued by a seller requesting a buyer to pay at a future date; Promissory Note matches the unconditional written promise made by a debtor to pay a creditor; Letter of Credit matches the guarantee issued by an importer's bank upon presentation of shipping documents; Bank Draft matches the cheque drawn by a bank upon its own funds.
Each credit instrument serves a specific commercial role: a Bill of Exchange is a seller-drawn order to pay; a Promissory Note is a debtor-issued promise to pay; a Letter of Credit is a bank guarantee for international trade conditioned on shipping documents; and a Bank Draft is a cheque drawn directly by a bank on its own funds.

Step-by-Step Solution

1
Identify the definition of a Bill of Exchange.
It is an unconditional written order drawn by a seller (creditor) demanding payment from a buyer (debtor) at a future date.
Bills of exchange originate from the seller to extend trade credit.
2
Identify the definition of a Promissory Note.
It is an unconditional written promise made and signed by the debtor promising to pay the creditor.
Unlike bills of exchange, promissory notes are promises initiated by the debtor.
3
Identify the definition of a Letter of Credit.
It is a foreign trade payment instrument issued by an importer's bank guaranteeing payment to an exporter upon presentation of shipping documents.
Letters of credit eliminate credit risk for exporters in international commerce.
4
Identify the definition of a Bank Draft.
It is a cheque drawn by a bank on its own reserves or branch, guaranteeing payment to the recipient.
Because it is drawn by a bank, it carries virtually no risk of dishonour.

Key Concept

Forms and Instruments of Credit
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Forms and Instruments of Credit

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