A short-term debt instrument issued by a firm that is guaranteed by a commercial bank. Banker's acceptances are issued by firms as part of a commercial transaction. These instruments are similar to T-Bills and are frequently used in money market funds. Banker's acceptances are traded at a discount from face value on the secondary market, which can be an advantage because the banker's acceptance does not need to be held until maturity. Banker's acceptances are regularly used financial instruments in international trade.
Banker's acceptances vary in amount, according to the size of the commercial transaction. The date of maturity typically ranges between 30 and 180 days from the date of issue. However, banks or investors often trade the instruments on the secondary market before the acceptances reach maturity. Banker's acceptances are considered to be relatively safe investments, since the bank and the borrower are liable for the amount that is due when the instrument matures.
A bankers' acceptance (BA) is a short-term credit investment created by a non-financial firm and guaranteed by a bank to make payment. Acceptances are traded at discounts from face value in the secondary market.
For corporations, a BA acts as a negotiable time draft for financing imports, exports or other transactions in goods. This is especially useful when the creditworthiness of a foreign trade partner is unknown.
Acceptances sell at a discount from the face value:
Face Value of Banker's Acceptance Rs 1,000,000
Minus 2% per Annum Commission for One Year Rs -$20,000
Amount Received by Exporter in One Year Rs 980,000
One advantage of a banker's acceptance is that it does not need to be held until maturity, and can be sold off in the secondary markets where investors and institutions constantly trade BAs.
