What is a Banker’s Acceptance?
A Banker’s Acceptance (BA) is a short-term debt instrument guaranteed by a bank, commonly used in international trade to facilitate secure payments between buyers and sellers.
Definition
A Banker’s Acceptance is a time draft backed by a bank, promising that the bank will pay the holder a specified amount on a future date, typically 30 to 180 days.
Table of Contents
- What is a Banker’s Acceptance?
- Key Takeaways
- Understanding Banker’s Acceptances
- Formula (If Applicable)
- Real-World Example
- Importance in Business and Economics
- Types or Variations
- Related Terms
- Sources and Further Reading
- Quick Reference
- Frequently Asked Questions (FAQs)
- Why do companies use banker’s acceptances?
- Are banker’s acceptances low risk?
- Can a BA be traded before maturity?
Key Takeaways
- A secure, bank-backed payment instrument used in trade.
- Functions as a negotiable money market instrument.
- Reduces credit risk between international trading partners.
- Can be sold at a discount before maturity.
Understanding Banker’s Acceptances
In international trade, sellers often want guaranteed payment before shipping goods. A buyer’s bank issues a BA to assure the seller that payment will be made at maturity. Once the bank “accepts” the draft, it becomes a BA—effectively a bank-guaranteed IOU.
Because BAs carry the credit strength of the accepting bank, they can be traded in secondary markets at discounted prices, functioning similarly to Treasury bills or commercial paper.
Formula (If Applicable)
Discounted Price = Face Value ÷ (1 + (Discount Rate × Days/360))
Real-World Example
- An exporter in China ships goods to a U.S. importer.
- The importer’s bank issues a BA promising payment in 90 days.
- The exporter sells the BA in the money market for immediate cash.
Importance in Business and Economics
Banker’s acceptances reduce transaction risk in global trade, improve liquidity for exporters, and provide investors with low-risk short-term instruments.
Types or Variations
| Type | Description | Example |
|---|---|---|
| Trade Acceptance | Draft guaranteed in trade transactions. | International shipping |
| Finance Acceptance | Used for financing needs not tied to specific shipment. | Working capital funding |
Related Terms
- Letter of Credit
- Commercial Paper
- Money Market Instruments
Sources and Further Reading
- Federal Reserve: Money Market Instruments
- ICC Trade Finance Guidelines
- Investopedia: Banker’s Acceptances
Quick Reference
- Core Concept: Bank-backed short-term trade instrument.
- Key Benefit: Reduces credit and settlement risk.
Frequently Asked Questions (FAQs)
Why do companies use banker’s acceptances?
To secure payment in international trade and access short-term liquidity.
Are banker’s acceptances low risk?
Yes—risk depends primarily on the issuing bank’s creditworthiness.
Can a BA be traded before maturity?
Yes, it is a negotiable instrument often sold at a discount.
