Definition:
A banker’s acceptance is a time draft drawn on and accepted by a bank. It’s a negotiable instrument that guarantees payment of a specified amount on a specific date.
Key characteristics of banker’s acceptances:
- Time draft: A time draft is a written order to pay a specified amount of money on a specific date.
- Acceptance: When a bank accepts a time draft, it guarantees payment of the draft.
- Negotiable instrument: Banker’s acceptances are negotiable instruments, which means they can be bought and sold in the financial markets.
- Safety: Banker’s acceptances are considered to be relatively safe investments, as they are backed by the creditworthiness of the issuing bank.
Why are banker’s acceptances used?
- Trade finance: Banker’s acceptances are often used in international trade to finance the purchase of goods.
- Investment vehicle: Banker’s acceptances can be a relatively safe and liquid investment option.
- Credit enhancement: The acceptance of a bank can enhance the creditworthiness of a time draft.
In essence, a banker’s acceptance is a time draft that is accepted by a bank, providing a guarantee of payment. They are often used in international trade and can be a relatively safe and liquid investment option.
