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Question

Difficulty: MediumMeans of Payment in Home Trade

A merchant in Ibadan needs to settle a large debt with a supplier in Enugu. To guarantee that payment is made directly from a bank's own funds without any risk of default or cheque dishonour, which payment instrument should the merchant purchase from the bank?

  1. Bank draftAnswer
  2. B
    Personal cheque
  3. C
    Standing order
  4. D
    Credit note

Answer

The merchant should purchase a bank draft from the bank.
A bank draft (also known as a banker's draft) is drawn by a bank on its own account or another branch, providing guaranteed payment to the payee because the money is debited from the customer's account upfront or paid in cash at the time of issue.

Step-by-Step Solution

1
Analyze the payment requirement
The payment must be guaranteed by a financial institution to eliminate the risk of dishonour or non-payment.
High-value trade debts between distant locations require secure and guaranteed payment methods.
2
Evaluate the nature of a bank draft
A bank draft is drawn by a bank on itself or its agent bank after receiving cash or debiting the purchaser's account.
Because the bank itself is liable for payment, a bank draft cannot be dishonoured for lack of funds.

Key Concept

Bank Draft as a Guaranteed Payment Instrument in Home Trade
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Topics

Means of Payment in Home Trade

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