CCP CCP Credit Insurance & Risk Mitigation 2

Question 1

A surety bond used in credit differs from trade credit insurance primarily because:

Accepted Answer

The surety has the right of subrogation and recovery from the principal (buyer) after paying a claim

Answer

In a surety arrangement the surety (bond issuer) can recover from the principal (the obligated party) after paying the obligee, unlike credit insurance where the insurer typically bears the loss.

Question 2

What risk mitigation technique involves requiring a customer to pay for goods before or upon delivery, used when credit risk is unacceptable?

Accepted Answer

Cash in advance (CIA) or cash on delivery (COD)

Answer

CIA and COD eliminate credit exposure entirely by ensuring payment is received before or at the time the seller parts with goods.

Question 3

Accounts receivable factoring transfers credit risk to the factor in which arrangement?

Accepted Answer

Non-recourse factoring

Answer

In non-recourse factoring the factor absorbs the credit risk of buyer non-payment due to insolvency, whereas recourse factoring leaves that risk with the seller.

Question 4

Which credit risk mitigation tool requires the buyer's bank to guarantee payment to the seller upon presentation of compliant documents?

Accepted Answer

Documentary letter of credit (LC)

Answer

A documentary LC obligates the issuing bank to pay upon receipt of specified trade documents that conform to LC terms, shifting payment risk from the buyer to the bank.

Question 5

When a credit manager uses a personal guarantee from a business owner, which risk is being mitigated?

Accepted Answer

The risk that a corporate entity lacks assets to satisfy a debt

Answer

A personal guarantee gives the creditor recourse to the owner's personal assets if the business entity cannot pay, addressing the limited-liability shield of incorporated buyers.

(CCP) Certified Credit Professional Practice Test

(CCP) Certified Credit Professional Practice Test

CCP CCP Credit Insurance & Risk Mitigation 2