TOPIC 4: MAJOR DOCUMENTS USED IN CREDIT TRANSACTIONS

Question 1

Are written documents or legal agreements that outline the terms and conditions of lending and borrowing, representing a promise by one party (the borrower) to repay a debt to another party (the lender) under specific terms.

Answer 1

CREDIT INSTRUMENTS

Question 2

NATURE OF CREDIT INSTRUMENTS

Answer 2

1. Legality and Formality
2. Transferability
3. Documentation of Debt
4. Security for Lenders
5. Conditionality

Question 3

CLASSIFICATION OF CREDIT INSTRUMENTS

Answer 3

1. As to Acceptability
2. As to Form
3. As to Function
4. As to Negotiability

Question 4

refers to how widely they are accepted and recognized by financial institutions, businesses, and the general public.

Answer 4

As to Acceptability

Question 5

As to Acceptability

Answer 5

(a) Limited Acceptance
(b) Unlimited Acceptance

Question 6

These are terms used in the context of credit instruments, particularly in trade and finance, to describe the terms under which a party agrees to honor a bill of exchange or similar financial document.

Answer 6

Limited acceptance and unlimited acceptance

Question 7

refers to a situation where the drawee (the person or entity to whom the bill of exchange is directed) agrees to accept the bill, but only under certain conditions or for a portion of the total amount specified in the bill. The drawee does not accept the full terms of the bill as initially presented.

Answer 7

Limited Acceptance

Question 8

Characteristics of limited acceptance

Answer 8

Conditional
Partial Acceptance
Geographical or Time-Based Limitations

Question 9

occurs when the drawee accepts the bill of exchange or other financial instrument in full and without any conditions or limitations. The drawee agrees to pay the full amount specified and adheres to the terms and conditions as originally stated on the bill.

Answer 9

Unlimited Acceptance

Question 10

Characteristics of unlimited acceptance

Answer 10

Full Acceptance
No Conditions
Straightforward Obligation

Question 11

refers to the structure and appearance of the document and whether it is formal or informal.

Answer 11

As to Form

Question 12

As to Form

Answer 12

(a) Order to Pay Instruments
(b) Promise to Pay Instruments

Question 13

involve a directive from one party (the drawer) to another (the drawee) to pay a specified sum of money to a third party (the payee). These instruments typically include an unconditional order, where the drawee is instructed to make a payment on behalf of the drawer.

Answer 13

Order to Pay Instruments

Question 14

A written order by one party (drawer) to another (drawee) to pay a certain sum of money to a third party (payee) on a specific future date or on demand. It is commonly used in trade transactions.

Answer 14

Bill of Exchange

Question 15

A written order directing a bank (the drawee) to pay a specific sum from the account of the person who writes the cheque (the drawer) to the payee. These are commonly used in everyday banking and business transactions.

Answer 15

Cheque

Question 16

The person who issues the order and instructs payment

Answer 16

Drawer

Question 17

The entity (often a bank) that is ordered to make the payment

Answer 17

Drawee

Question 18

The recipient of the payment

Answer 18

Payee

Question 19

involve a direct commitment by one party (the maker) to pay a specified sum of money to another party (the payee) either on demand or at a future date.

Answer 19

promise to pay

Question 20

A written, unconditional promise by one party (the maker) to pay a specified sum of money to another party (the payee) either on demand or at a fixed or determinable future date. These are widely used in lending agreements, including personal loans and business financing.

Answer 20

Promissory Note

Question 21

An informal promise to pay, typically used between individuals, acknowledging a debt without formal legal terms. It may lack detailed repayment terms, making them less formal than promissory notes.

Answer 21

IOU (I Owe You)

Question 22

The person or entity that issues the promise to pay

Answer 22

Maker

Question 23

refers to how credit serves different roles or purposes in the economy.

Answer 23

As to function

Question 24

As to function

Answer 24

(a) Productive Credit
(b) Consumer Credit
(c) Commercial Credit
(d) Investment Credit
(e) Development Credit
(f) Real Estate Credit

Question 25

refers to loans or credit extended for investment in productive activities, typically aimed at generating income or profit. This type of credit is used to fund activities that contribute to the creation of goods and services, boosting economic activity and growth.

Answer 25

Productive credit

Question 26

Loans used by companies to finance operations, acquire assets, or expand their business.

Answer 26

Business Loans

Question 27

Loans provided to farmers for purchasing seeds, fertilizers, machinery, or to expand agricultural activities

Answer 27

Agricultural Credit

Question 28

Credit extended to businesses for trading purposes, such as purchasing raw materials, inventory, or financing production.

Answer 28

Commercial Credit

Question 29

credit extended to individuals to finance personal consumption or purchases of goods and services that do not directly generate income or wealth. This type of credit is used for buying durable goods (such as cars, appliances) or financing household expenses.

Answer 29

Consumer credit

Question 30

A revolving credit line that consumers use to purchase goods and services, repayable over time with interest

Answer 30

Credit Cards

Question 31

Loans taken by individuals for personal expenses such as home renovations, medical bills, or vacations.

Answer 31

Personal Loans

Question 32

Loans used to purchase goods such as cars, electronics, or appliances, repaid over a fixed period with interest.

Answer 32

Installment Loans

Question 33

refers to the credit extended to businesses or firms to facilitate commercial activities, such as trade, production, or services. It is typically used for short-term purposes to cover operational expenses or bridge cash flow gaps in business operations.

Answer 33

Commercial credit

Question 34

A form of commercial credit where suppliers allow businesses to purchase goods or services on credit, with payment due at a later date.

Answer 34

Trade Credit

Question 35

Loans used by businesses to finance short-term operational needs, such as paying suppliers or covering payroll.

Answer 35

Working Capital Loans

Question 36

A financial guarantee used in international trade, where a bank ensures that a seller will receive payment from the buyer upon fulfillment of contractual terms.

Answer 36

Letter of Credit (LC)

Question 37

is used for long-term investments, typically aimed at funding large projects, purchasing capital assets, or making significant financial investments. This type of credit is focused on generating future returns.

Answer 37

Investment Credit

Question 38

Loans taken to purchase real estate properties, either for personal use or as an investment.

Answer 38

Real Estate Loans

Question 39

Credit extended to fund large infrastructure projects like highways, bridges, or energy facilities.

Answer 39

Infrastructure Financing

Question 40

Loans taken to invest in stocks, bonds, or other financial instruments, often with the aim of generating long-term returns.

Answer 40

Equity Financing

Question 41

is aimed at funding economic development initiatives, typically in underdeveloped or developing regions. It is often extended by governments, financial institutions, or international organizations to fund projects that improve infrastructure, education, healthcare, and other critical sectors.

Answer 41

Development credit

Question 42

Loans provided by international organizations like the World Bank to fund infrastructure projects, healthcare, or education in developing nations.

Answer 42

World Bank Loans

Question 43

Small loans extended to low-income individuals or small businesses in developing areas to promote economic self-sufficiency.

Answer 43

Microfinance

Question 44

Loans provided by governments to support regional development, especially in underdeveloped areas.

Answer 44

Government Development Loans

Question 45

involves loans or credit used specifically for purchasing, developing, or refinancing property. It serves both individuals and businesses, helping them acquire or develop real estate for personal use, investment, or commercial purposes.

Answer 45

Real estate credit

Question 46

Long-term loans used by individuals or businesses to purchase or refinance real estate, with the property serving as collateral.

Answer 46

Mortgage Loans

Question 47

Loans used to finance the construction of residential or commercial buildings.

Answer 47

Construction Loans

Question 48

Loans secured against the value of a person’s home, often used for renovations or other expenses.

Answer 48

Home Equity Loans

Question 49

refers to the ability of these instruments to be transferred from one party to another, which impacts how they can be used in financial transactions.

Answer 49

As to Negotiability

Question 50

As to Negotiability

Answer 50

(a) Negotiable Credit Instruments (b) Non-Negotiable Credit Instruments

Question 51

it determines whether a credit instrument can be easily endorsed, transferred, or sold in the secondary market.

Answer 51

Negotiability

Question 52

financial instruments that can be transferred from one party to another, allowing the holder to claim the rights to payment or performance. These instruments are characterized by their ability to be easily endorsed, transferred, or sold, which enhances their liquidity and utility in commercial transactions.

Answer 52

Negotiable credit instruments

Question 53

A written promise by one party to pay a specified sum to another party either on demand or at a fixed future date. They can be endorsed and transferred.

Answer 53

Promissory Notes

Question 54

A written order by one party (the drawer) directing another party (the drawee) to pay a specified sum to a third party (the payee). These can also be endorsed.

Answer 54

Bills of Exchange

Question 55

An order directing a bank to pay a specified sum from the drawer's account to the payee.

Answer 55

Cheques

Question 56

Securities that are payable to the holder, meaning whoever possesses the bond can claim payment. They can be transferred easily without formal endorsement.

Answer 56

Bearer Bonds

Question 57

negotiable and can be transferred to another party, allowing the new holder to claim the deposit amount.

Answer 57

Certificates of Deposit (CDs)

Question 58

are financial instruments that cannot be easily transferred or assigned to another party. The rights and obligations associated with these instruments remain with the original parties, and any transfer usually requires explicit consent from all involved parties.

Answer 58

Non-negotiable credit instruments

Question 59

Informal acknowledgments of debt that are not typically transferable and do not convey rights to the holder.

Answer 59

IOUs (I Owe You)

Question 60

Contracts that explicitly state they are non-negotiable or non-transferable, often seen in personal agreements or specific business contracts.

Answer 60

Certain Contracts

Question 61

Contracts that explicitly state they are non-negotiable or non-transferable, often seen in personal agreements or specific business contracts.

Answer 61

Certain Contracts

Question 62

Checks that indicate they are non-negotiable (usually stated on the check) cannot be transferred to another party.

Answer 62

Certain Types of Certificates of Deposit (CDs)