Brocker.Org: Money Market: Banker’s Acceptance

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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. Bankers acceptances are considered very safe instruments and are used extensively in foreign trade.

Banker’s acceptances often arise from a business needing to make a major purchase overseas. BAs are time drafts that a business can order from the bank. The financial institution promises to pay the exporting firm a specific amount on a specific date, at which time it recoups its money by debiting the importer’s account. The BA works much like a post-dated check, which is simply an order for a bank to pay a specified party at a later date. The holder may also choose to sell the BA for a discounted price on a secondary market, giving investors a relatively safe, short-term investment.

BAs are frequently used in international trade because of advantages for both sides. Exporters often feel safer relying on payment from a reputable bank than a business with which it has little if any history. Once the bank verifies, or “accepts”, a time draft, it becomes an obligation of that institution.

Most banker’s acceptances are back by invoices, bills of lading or the physical goods being financed. The issuing bank stamps “accepted” on the document, hence the name.

The importer may turn to a banker’s acceptance when it has trouble obtaining other forms of financing, or when a BA is the least expensive option. The advantage of borrowing is that it receives the goods and has the opportunity to resell them before making payment to the bank.

Banks typically charge a 2% fee so if the face value is $1 million then the importer will receive $980,000 net.

Banker’s acceptances can be bought and sold on the secondary market creating liquidity. There is an active market for BAs.

Money Market: Eurodollars

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