Unit 2

Question 1

What is a performance bond?

Answer 1

A form of guarantee used e.g. at the start of a new contract, to provide cover for the failure in the performance of a contract.

Question 2

What is negative working capital?

Answer 2

When current liabilities are greater than current income or assets.

Question 3

Benefit of diversification in borrowing profile.

Answer 3

Greater range of lenders = reduce any issues when refinancing.

Question 4

Value date v finality of cheque.

Answer 4

Value date = date from which the cheque became valid.
Finality = date on which the credit has been finalised/ cashed so cannot be cancelled by the ordering party.

Question 5

What is overtrading?

Answer 5

When a company expands their operations too quickly without the resources to support the growth.

Question 6

What is herstatt risk?

Answer 6

The risk present when only one side of the FX trade has been settled but the receivable leg has not yet been paid. Can be reduced using continuous linked settlement.

Question 7

What is clearing?

Answer 7

The process of recording transactions between members of a clearing channel.

Question 8

What is settlement?

Answer 8

The actual transfer of value from one settlement account to another account.

Question 9

How do net settlement systems work?

Answer 9

At the end of each period all positions between participants are netted off and participating banks settle with each other across settlement accounts.

Question 10

What type of transactions are net settlement systems used for?

Answer 10

• high volume, low value transactions.
• cheque clearings
• BACs (UK), ACH (US)

Question 11

How does real time gross settlement eliminate credit risk?

Answer 11

Clearing payment singly and bilaterally as the payments occur.

Question 12

What is a hybrid clearing and settlement system? (Give examples)

Answer 12

• systems which settle on a net basis but at pre defined periods throughout the working day.
• can provide intraday finality.
  E.g. CHIPS, CLS

Question 13

How does SWIFT work?

Answer 13

Sends payment orders between banks using SWIFT codes.

Question 14

What is BIC and why is it useful?

Answer 14

• BIC = bank identifier codes
• Owned and administered by SWIFT
• used to identify a bank and send a secure payment quickly

Question 15

What is a BIC comprised of?

Answer 15

First 4 letters = bank code
Next 2 letters = country code
Next 2 letters = banks location
Next 3 (optional) = bank branch

Question 16

What is a bank draft?

Answer 16

A cheque drawn on the bank.

Question 17

What is a paper based giros?

Answer 17

A credit transfer system through which payment instructions are transmitted through the bank or the postal giro system.

Mainly for low value consumer to business payments.

Question 18

How does a bill of exchange work?

Answer 18

The customer (drawer) instructs the bank (drawee) to pay the seller (beneficiary) on a specific date (maturity).

On the maturity date the bank will pay the seller and debit the customers bank account.

Question 19

What is a promissory note?

Answer 19

A writer unconditional promise by the buyer to pay money to the seller either on demand or on a specific date.

Used for trade related transactions between counter parties that are well acquainted.

Does not have the legal standing of a bill of exchange.

Question 20

What is the advantage of electronic payment instructions over physical?

Answer 20

Facilitates straight through processing (STP) whereby data is transmitted through systems with minimum human intervention.

Question 21

What are examples of urgent high value electronic payment systems?

Answer 21

• CHAPS (UK)
• CHATS(HK)
• Fedwires
• CHIPS (USA)

Question 22

What is ACH?

Answer 22

• Automated clearing house
• electronic systems designed for non urgent, low value bank transfers or giros.
• may require transfers to be initiated days in advance of remittance.
• varies depending on country, method of clearing, bank and credit standing of customer.
  -one off transfers, bulk orders, standing orders, DDs.

Question 23

What is a standing order?

Answer 23

An instruction given by the account holder to the bank to pay a beneficiary a specified amount of money on a periodic basis.

Question 24

What is a direct debit?

Answer 24

Collection method where the payment is initiated/ pulled by the beneficiary subject to the payers prior consent in a formal agreement.

Question 25

What is EDI?

Answer 25

• Electronic data interchange and bill payment.
• consolidated invoices and information from the payers systems into 1 single payment.

Question 26

What are the key components of working capital?

Answer 26

Trade payables, trade receivables and inventory

Question 27

What is the operating cash cycle?

Answer 27

The time period between the payment for raw materials and the receipt of cash for finished goods.

Question 28

What is the role of export credit agencies?

Answer 28

Credit card = provide credit to individual
Export credit agency = providing short term credit to small/medium sized companies
Support and advice for export activities including guarantees
Export credit insurance

Question 29

What is a bid bond?

Answer 29

A bid bond is issued by the bank of the company submitting the tender to ensure the bidder will honour the bid if selected or pay damages to the buyer.

Used for large scale projects which may be internationally tended.

Question 30

What is an advance payment bond?

Answer 30

Bond issued by suppliers bank against any advance payment to allow the buyer to recover payment in the event of non delivery of work.

Question 31

What is a performance bond?

Answer 31

Bond issued by suppliers bank when a contract is won.

Cover against unsatisfactory performance.

Question 32

What is a surety bond?

Answer 32

Us bond issued by insurance company