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Chapter 5: Q10DQ (page 680)

What is a letter of credit?

Short Answer

Expert verified

A letter of credit is the document issued by the bank on behalf of the buyer that promises a specified amount of payment to the seller.

Step by step solution

01

Letter of Credit

A letter of credit issued by a bank to another bank to serve as a guarantee for payments made to a specified person under specified conditions.

02

Documents in letter of credit

The overall process of a letter of credit includes the following documents: -

  • Transport document
  • Insurance document
  • Commercial invoice
  • Bills of exchange
  • Certificate of origin
  • Packing list
  • Inspection certificate

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Most popular questions from this chapter

If a firm wishes to achieve immediate appreciation in earnings per share as a result of a merger, how can this be best accomplished in terms of exchange variables? What is a possible drawback to this approach in terms of long-range considerations?

What are the differences between a parallel loan and a fronting loan?

What is the difference between horizontal integration and vertical integration? How does antitrust policy affect the nature of mergers?

Suggest some ways in which firms have tried to avoid being part of a target takeover

Chicago Savings Corp. is planning to make an offer for Ernie鈥檚 Bank & Trust. The stock of Ernie鈥檚 Bank & Trust is currently selling for \(44 a share.

a.If the tender offer is planned at a premium of 50 percent over market price, what will be the value offered per share for Ernie鈥檚 Bank & Trust?

b.Suppose before the offer is actually announced, the stock price of Ernie鈥檚 Bank & Trust goes to \)60 because of strong merger rumors. If you buy the stock at that price and the merger goes through (at the price computed in part a), what will be your percentage gain?

c.Because there is always the possibility that the merger could be called off after it is announced, you also want to consider your percentage loss if that happens. Assume you buy the stock at \(60 and it falls back to its original value after the merger cancellation, what will be your percentage loss?

d. If there is an 80 percent probability that the merger will go through when you buy the stock at \)60, and only a 20 percent chance that it will be called off, does this appear to be a good investment? Compute the expected value of the return on the investment.
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