What is the purpose of a letter of credit? a) It is a document written by an exporter instructing an importer to pay a specified amount of money at a specified time. b) It allows buyers to obtain possession of merchandise without signing a formal document acknowledging his or her obligation to pay. c) It indicates that the carrier has received the merchandise described on the face of the document. d) It serves as a receipt, a contract, and a document of title. e) It states that the bank will pay a specified sum of money to a beneficiary on presentation of particular, specified documents.

A letter of credit (LoC) is a document issued by a bank that guarantees payment for goods upon presentation of required documentation. A LoC must state the amount of money that the bank will pay to the beneficiary of the LoC and what specific documents the beneficiary must present in order to collect the payment.

Usually LoC are used in international trade because they solve problems related to long distances, different laws regarding trade, and not knowing who is the seller or the buyer. Banks charge fees for issuing LoC, but they assume responsibility for making the payment.