List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Understanding Banker's Acceptance. Advantages and Disadvantages of BAs. The Bottom Line. Key Takeaways The banker's acceptance is a form of payment that is guaranteed by a bank rather than an individual account holder.
The bank guarantees payment at a later time. BAs are most frequently used in international trade to finalize transactions with relatively little risk to either party. Banker's acceptances are traded at a discount in the secondary money markets. Thus, unlike a post-dated check, BAs can be investments that are traded, generally at a discounted price similar to Treasury bills. Banker's acceptances are a relatively safe form of payment for both sides of a transaction. Pros It provides the seller assurances against default.
It provides the ability to purchase and sell goods in a timely manner. It has a relatively low cost compared to the hedge or benefit provided. The buyer may default, forcing the financial institution to make the payment. Article Sources. Investopedia requires writers to use primary sources to support their work.
These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.
You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. US bankers issue Bankers Acceptance to the German firm for a credit period Credit Period Credit period refers to the duration of time that a seller gives the buyer to pay off the amount of the product that he or she purchased from the seller.
Once the exporter ships the mobiles, it provides the evidence i. Now, the German firm has the option either to hold the bill until maturity or discount it today through the German Bank. Through discounting, it receives the amount today itself with a cut of say 6. This is called discounting of the bill. The ultimate holder receives the face value. Thus, such an instrument can be traded at a discount to face. The discount to face value is nothing but the interest rate charged at a nominal spread over the US treasury bills Treasury Bills Treasury Bills or a T-Bill controls temporary liquidity fluctuations.
The Central Bank is responsible for issuing the same on behalf of the government. Studies in Economics and Finance , 30 3 , Index participation units and the performance of index futures markets: Evidence from the Toronto 35 index participation units market , Park, T.
Index participation units and the performance of index futures markets: Evidence from the Toronto 35 index participation units market. The Journal of Futures Markets , 15 2 , A directional analysis of the Bureau for Economic Research's quarterly forecasts. The solution is for the U. The letter of credit will state that the German company will receive their funds upon presentation of an invoice and shipping documents with a time draft demanding payment.
The bank will examine the documents and if everything is in order, accept the time draft and agree to pay a specific amount to the exporter on the due date of the draft. When the German exporter receives his accepted time draft from the bank, he can either hold the draft until maturity, or he can discount the draft and receive his funds immediately, less the bank fees. Since bankers' acceptances are an unconditional obligation by a bank to pay at the maturity date, investors consider them very safe investments, and an active secondary market exists.
Bankers' acceptances trade as bearer instruments at a discount from face value.
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