What is a Letter of Credit and what three assurances does it provide?

• A. A shipping document.
• B. A bill of lading.
• C. An insurance policy.
• D. A bank's obligation to pay the seller upon presentation of compliant documents; assures the seller of payment, the buyer of shipment, and reduces payment risk.

Answer: (D)

A letter of credit is a bank’s promise to pay the seller on behalf of the buyer, as long as the seller presents documents that strictly meet the terms of the credit. This arrangement is designed for international trade where trust and risk are higher. The three assurances come from the bank’s obligation: the seller is assured of payment if the required documents are in order; the buyer is assured that payment will only be made after shipment and proper documentation proves it; and the overall risk of payment is reduced because the bank guarantees the payment, not the buyer’s ability to pay. This is not just a shipping document, a bill of lading, or an insurance policy—the letter of credit is the bank’s backing that ties payment to documentary compliance and shipment.