Part 1Which of the following may not be used as a backup line of credit? Part 2
A. Standby letters of credit B. Mortgages C. Loan commitments D. Overdraft privileges

Question

Part 1Which of the following may not be used as a backup line of​ credit? Part 2
A. Standby letters of credit B. Mortgages C. Loan commitments D. Overdraft privileges

BlackTom AI · Accepted Answer

In this question, we assess which item may not function as a backup line of credit.
Option A: Standby letters of credit. These instruments provide a guarantee of payment from a bank if the applicant fails to perform, and they can act as a backup line of credit in certain contexts, so this is a plausible backup facility.
Option B: Mortgages. A mortgage is a long-term secured loan on real estate and is not typically used as a responsive backup line of credit for ongoing, short-term liquidity needs. Mortgages are structured credit products with specific amortization and release conditions, making them unsuitable as a routine backup credit line.
Option C: Loan commitments. A loan commitment is an agreement by a lender to supply a specified amount of funds to a borrower upon request, effectively functioning as a ready backup line of credit, so this can be used as such.
Option D: Overdraft privileges. Overdraft protection or privileges authorize the account to borrow shortfalls up to a limit, clearly serving as a backup line of credit for everyday account activity, so this is a valid backup facility.

Taken together, the statement that cannot be used as a backup line of credit is Mortgages, because its purpose and structure differ from revolving or contingent credit facilities and it is not typically drawn upon as a flexible liquidity backup.

Homework:Chapter 9 Homework

Part 1Which of the following may not be used as a backup line of credit? Part 2 A. Standby letters of credit B. Mortgages C. Loan commitments D. Overdraft privileges

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