Question

Standby letters of credit A. are a promise by a large depositor to provide additional funds to a bank should the bank face an unexpectedly large deposit outflow. B. represent the unused balance on a bank credit card. C. are a promise by a bank to lend the borrower funds to pay off its maturing commercial paper. D. are a form of swaps.

Answer 1

The correct answer is letter "C": are a promise by a bank to lend the borrower funds to pay off its maturing commercial paper.

Step-by-step explanation:

A standby letter of credit is a document that serves as a guarantee in front of the default of a buyer or seller in an agreement between the two parties. For instance, if the buyer defaults for a given reason, the bank that grants the standby letter of credit is responsible for paying off the outstanding debt. Another example of when the standby letter of credit comes into action is when both the buyer and the seller are certain of their responsibilities but after delivering the goods to the buyer they do not meet the buyers' expectations.