1. What is the primary purpose of a Letter of Credit (LC)?
A. To provide a personal guarantee
B. To act as a loan agreement
C. To ensure payment to the seller upon fulfilling specified conditions
D. To issue a cheque on behalf of the buyer
A Letter of Credit is a payment mechanism used in international trade to guarantee the seller receives payment once they meet the terms specified in the LC.
2. Who is the party that requests the issuing bank to open a Letter of Credit?
A. Beneficiary
B. Applicant
C. Advising Bank
D. Negotiating Bank
The applicant (buyer/importer) requests the issuing bank to open a Letter of Credit in favor of the seller (beneficiary).
3. In an LC transaction, the party who receives payment on fulfillment of conditions is called:
A. Issuing Bank
B. Applicant
C. Confirming Bank
D. Beneficiary
The beneficiary is the seller/exporter who receives payment from the bank once the LC conditions are complied with.
4. Which of the following is NOT a common consideration for issuing an LC?
A. Personal preference of the bank manager
B. Creditworthiness of the applicant
C. Nature and value of the goods
D. Compliance with banking regulations
Banks consider factors like applicant’s creditworthiness, nature and value of goods, and regulatory compliance. Personal preference is not a valid consideration.
5. The bank that advises the LC to the beneficiary without assuming any payment obligation is called:
A. Issuing Bank
B. Confirming Bank
C. Advising Bank
D. Negotiating Bank
The advising bank informs the beneficiary about the LC and transmits documents but does not undertake payment obligation.
6. Which document is crucial for the beneficiary to claim payment under an LC?
A. Applicant’s cheque
B. Compliance documents specified in the LC (invoice, shipping documents, etc.)
C. Bank statement of the applicant
D. Letter from the bank manager
Payment under LC is made only when the beneficiary submits documents meeting the LC terms, such as invoice, bill of lading, insurance certificate, etc.
7. Which of the following is a type of Letter of Credit where the issuing bank adds its own commitment to pay?
A. Revocable LC
B. Standby LC
C. Confirmed LC
D. Back-to-back LC
A Confirmed LC is one where another bank (usually in the exporter's country) adds its own guarantee to pay, in addition to the issuing bank’s commitment.
8. Which type of LC can be amended or canceled by the issuing bank without prior consent of the beneficiary?
A. Revocable LC
B. Irrevocable LC
C. Standby LC
D. Revolving LC
A revocable LC can be modified or canceled by the issuing bank at any time without notifying or obtaining consent from the beneficiary.
9. Which LC is specifically issued to cover a buyer’s performance obligations or as a guarantee?
A. Sight LC
B. Standby LC
C. Revolving LC
D. Deferred Payment LC
A Standby LC acts as a guarantee or backup payment mechanism if the applicant fails to fulfill contractual obligations.
10. Which document under a Letter of Credit provides proof of shipment of goods?
A. Invoice
B. Insurance Certificate
C. Packing List
D. Bill of Lading
The Bill of Lading serves as proof of shipment, detailing the goods transported, carrier, and terms of delivery.
11. Which document under LC certifies that goods are insured against loss or damage during transit?
A. Insurance Certificate
B. Bill of Exchange
C. Commercial Invoice
D. Packing List
The Insurance Certificate guarantees that the goods are insured against risks such as loss, theft, or damage during transportation.
12. Which of the following documents is submitted by the beneficiary to claim payment under LC?
A. Applicant’s Bank Statement
B. Letter from the issuing bank
C. All documents specified in LC (invoice, shipping, insurance, etc.)
D. Applicant’s Purchase Order
Payment is made only when the beneficiary submits all documents meeting the LC terms, including invoice, shipping documents, and insurance certificate.
13. What does UCPDC 600 stand for in banking practice?
A. Uniform Commercial Practices for Domestic Credits
B. Uniform Customs and Practice for Documentary Credits
C. Universal Credit and Payment Directive Code
D. Uniform Compliance Procedures for Domestic Credits
UCPDC 600 provides standardized rules published by ICC for the use of Documentary Credits in international trade.
14. Which organization publishes the UCPDC 600 rules?
A. RBI
B. WTO
C. International Chamber of Commerce (ICC)
D. IMF
The ICC (International Chamber of Commerce) issues the UCPDC rules to standardize documentary credit practices globally.
15. Under UCPDC 600, which of the following is TRUE about a bank’s responsibility?
A. The bank deals with documents only, not goods, services, or performance
B. The bank inspects goods before payment
C. The bank guarantees the quality of goods
D. The bank arranges transportation of goods
UCPDC 600 emphasizes that banks deal with documents alone, not with the underlying goods or services.
16. Which UCPDC 600 article deals with the examination of documents by banks?
A. Article 5
B. Article 12
C. Article 10
D. Article 14
Article 14 of UCPDC 600 specifies rules for examination of documents, including timelines and compliance criteria for banks.
17. Under UCPDC 600, what is the standard timeframe for a bank to examine documents?
A. 24 hours after presentation
B. 5 banking days following presentation
C. 10 banking days
D. 15 calendar days
UCPDC 600 states that banks should examine documents within five banking days after presentation to determine compliance.
18. According to UCPDC 600, what happens if documents are found discrepant?
A. Bank must pay the beneficiary immediately
B. Bank can ignore the discrepancy
C. Bank must inform the presenter and seek instructions from the applicant
D. Bank returns documents without notice
If documents are discrepant, banks must notify the presenter and seek instructions from the applicant before taking any action.
19. UCPDC 600 is applicable to which type of credit?
A. Documentary Credits
B. Bank Loans
C. Overdraft Facilities
D. Term Deposits
UCPDC 600 provides rules and practices specifically for Documentary Credits used in international trade.
20. Which of the following statements is TRUE regarding UCPDC 600?
A. Banks are responsible for the quality of goods shipped
B. UCPDC 600 replaces domestic banking laws
C. UCPDC 600 applies only to domestic transactions
D. Banks deal only with documents, not the goods or services themselves
UCPDC 600 clarifies that banks examine and pay against documents only, not inspecting or guaranteeing the underlying goods or services.
21. What is the primary obligation of a bank issuing a Letter of Credit?
A. To inspect the quality of goods shipped
B. To transport goods to the beneficiary
C. To honor payment against complying documents
D. To provide loans to the applicant
The issuing bank’s primary obligation is to make payment to the beneficiary upon presentation of documents that comply with the LC terms, without checking the goods themselves.
22. Under a Letter of Credit, when is the bank required to make payment?
A. Only when presented documents strictly comply with LC terms
B. As soon as goods are shipped
C. After the applicant confirms shipment quality
D. On a pre-decided date regardless of documents
Payment is made only against documents that fully comply with the terms and conditions of the LC, as per UCPDC rules.
23. Which of the following is NOT a primary obligation of the issuing bank under LC?
A. Examining presented documents
B. Verifying the quality of goods
C. Making payment on complying documents
D. Notifying discrepancies to the presenter
Banks deal only with documents, not the quality or condition of goods. Examining documents and paying on compliance are primary obligations.
24. Under a confirmed LC, which bank adds its own payment commitment in addition to the issuing bank?
A. Advising Bank
B. Negotiating Bank
C. Reimbursing Bank
D. Confirming Bank
A Confirming Bank provides an additional guarantee to pay the beneficiary upon presentation of compliant documents, alongside the issuing bank’s obligation.
25. What action should the issuing bank take if presented documents are discrepant?
A. Make payment immediately
B. Destroy the documents
C. Notify the presenter and seek applicant instructions
D. Transfer the documents to another bank without notice
If documents are discrepant, the bank must inform the presenter and seek instructions from the applicant before deciding to pay, refuse, or negotiate.
26. Which of the following best describes the bank’s responsibility in paying under an LC?
A. Payment depends on the actual delivery and quality of goods
B. Payment depends solely on presentation of documents in compliance with LC terms
C. Payment depends on buyer’s instructions to accept goods
D. Payment is optional based on bank discretion
As per UCPDC 600, banks honor payment only against documents that strictly comply with LC terms, irrespective of goods quality or delivery.
