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Question

Difficulty: EasyMeans of Payment in Home Trade

A trader in Lagos wants to settle an account with a manufacturer in Kano who refuses to accept personal cheques due to the risk of dishonour. Which of the following payment instruments issued by a commercial bank guarantees payment upon presentation?

  1. Bank draftAnswer
  2. B
    Ordinary cheque
  3. C
    Postal order
  4. D
    Credit note

Answer

Bank draft
A bank draft is an instrument issued by a commercial bank guaranteeing payment upon presentation because the buyer pays for it up front when it is drawn against the bank's own funds.

Step-by-Step Solution

1
Identify the payment requirement in the scenario
The payee requires a secure, bank-issued payment instrument that eliminates the risk of default or dishonour associated with personal cheques.
Personal cheques rely on individual account balances, which may be insufficient at presentation.
2
Evaluate the commercial payment instruments listed
A bank draft is a cheque drawn by one bank on itself or another branch of the same bank, guaranteeing that funds are pre-secured and payment is guaranteed.
Because the bank pays from its own funds after debiting the purchaser at issuance, dishonour risk is eliminated.

Key Concept

Means of Payment in Home Trade - Bank Drafts
Estimated Time:45s
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Topics

Means of Payment in Home Trade

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