Question

Multiple Choice:

1. An agreement by a bank which guarantees payment on the prompt arrival of a shipment of goods from an overseas supplier is called a:

• Compensating agreement.

• Blanket inventory lien.

• Line of credit.

• Factored inventory loan.

• Letter of credit.

2. Which of the following is the best definition of speculative motive?

• Bank makes proceeds of cheques deposited available the same day before cheques clear.

• The need to hold cash to take advantage of additional investment opportunities, such as bargain purchases.

• Special post office boxes set up to intercept and speed up accounts receivable payments.

• The need to hold cash as a safety margin to act as a financial reserve.

• Much like an automated teller machine card; one use is within corporations to control access to information by employees

3. The fixed cost of a securities trade:

• Will affect a firm with an average trade value of $10,000 less than a firm with an average trade value of $100,000.

• Has more impact on firms following a flexible cash policy than a firm following a restrictive cash policy.

• Has more bearing on the target cash balance as the number of trades increases.

• Varies with the average number of cheques processed in any stated period of time.

• Is normally minimal so it can be ignored when trying to establish optimal cash balance levels.

Answer 1

1. An agreement by a bank which guarantees payment on the prompt arrival of a shipment of goods from an overseas supplier is called letter of credit.

Letter of credit means agreement by the bank which will help in in getting goods through another suppliers in the foreign state and it will help the parties to get overseas goods and services.

It is not related to compensating agreement or blanket inventory Lien or line of credit or factor inventory loan.

Correct answer would be option (E) Letter of Credit.