letter of credit

Letter of Credit

A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount.

Notes:

Often used in international transactions to ensure that payment will be received.

See also: Irrevocable Letter of Credit, Sight Letter of Credit, Standby Letter of Credit, Trade Finance

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Letter of credit (LOC)

A form of guarantee of payment issued by a bank on behalf of a borrower that assures the payment of interest and repayment of principal on bond issues.

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letter of credit

A promise of payment in the event that certain requirements are met. A letter of credit essentially substitutes the credit of a third party (usually a large bank) for that of a borrower. In the case of municipal bonds, an LOC generally permits a trustee to draw six months' interest and sufficient funds to retire outstanding bonds at par in the event of default.