Banker’s Acceptance – Definition

Cite this article as:"Banker’s Acceptance – Definition," in The Business Professor, updated September 12, 2019, last accessed October 22, 2020, https://thebusinessprofessor.com/lesson/bankers-acceptance-definition/.

Back To: COMMERCIAL LAW: CONTRACTS, PAYMENTS, SECURITY INTERESTS, & BANKRUPTCY

Banker’s Acceptance Definition

A banker’s acceptance (BA) is a debt instrument which is guaranteed by a commercial bank and issued by an individual company. A banker’s acceptance represents the commitment of a commercial bank to make a payment in the future. This acceptance is commonly used in commercial transactions or money market funds and issued as a short-term debt instrument. A banker’s acceptance can also be referred to as a commercial bank draft which reflects the commitment of the bank to pay whoever holds the acceptance a certain amount at a future date.

A Little More on What is a Banker’s Acceptance

A banker’s acceptance is a draft that contains the amount of money the holder of the instrument must be paid at a specified date. Bankers’ acceptances are issued by companies and backed by commercial banks, the short-term debt instrument allows the holder or bearer to receive the amount stated in the acceptance on the specified date. When Banker’s acceptances are used, the drawer of the acceptance must provide the bank with the sufficient funds needed for the acceptance.

Being a short-term negotiable instrument, a banker’s acceptance can have a maturity date which ranges from 30 to 180 days. There are certain eligibility requirements that drawers of banker’s acceptance must meet before commercial banks accept them.

Banker’s Acceptance as Investment Vehicles

In certain cases, banker’s acceptances are used as invetsmnet vehicles which are traded in the secondary market by banks or investors. These instruments can be traded before they reach their maturity period. Investors generate profit when they trade banker’s acceptance in the secondary market. These investmnet vehicles are generally safe and the holder of a banker’s acceptance need not to worry about default in payment when the instrument reaches maturity.

Banker’s Acceptance and International Trade

Banker’s acceptances are generally safe instruments this is a major factor that informs their usage in international trade. When these instruments are used for trading, the bank alongside the drawer of the instrument are liable to pay the amount stated in the draft when it is due. When used in international trade dealings, it creates a room for free-flow of transactions without an extension of credit. Largely, banker’s acceptances are adopted based on the creditworthiness of the banking institution instead of that of the drawer. Hence, holders of banker’s acceptances are assured that they will receive payments of the maturity date without any failure.

 Reference for “Banker’s Acceptance – BA”

https://www.investopedia.com/university/moneymarket/moneymarket5.asp

https://www.investopedia.com › Investing › Bonds / Fixed Income

https://en.wikipedia.org/wiki/Bankers%27_acceptance

https://thismatter.com/money/bonds/types/money-market…/bankers-acceptances.htm

https://www.cimbbank.com.my/en/business/products/…at…/bankers-acceptance.html

Academics research on “Banker’s Acceptance – BA”

Macroeconomic surprises and stock returns in South Africa, Gupta, R., & Reid, M. (2013). Macroeconomic surprises and stock returns in South Africa. Studies in Economics and Finance30(3), 266-282.

Index participation units and the performance of index futures markets: Evidence from the Toronto 35 index participation units market, Park, T. H., & Switzer, L. N. (1995). Index participation units and the performance of index futures markets: Evidence from the Toronto 35 index participation units market. The Journal of Futures Markets (1986-1998)15(2), 187.

A directional analysis of the Bureau for Economic Research’s quarterly forecasts, Van Walbeek, C., & Sessions, M. (2007). A directional analysis of the Bureau for Economic Research’s quarterly forecasts. Studies in Economics and Econometrics31(3), 119-138. This paper investigates the ability of the Bureau for Economic Research (BER) to forecast directional changes in gross domestic product (GDP), gross domestic expenditure (GDE), final consumption expenditure by households (FCEH) and the Prime and Bankers’ Acceptance (BA) interest rates. The analysis is based on the BER’s quarterly forecasts for the period 1988Q1 to 2004Q4 published in Economic Prospects. Using Henriksson and Merton’s (1981) test for independence and directional correctness, it is found that the BER’s forecasts of GDE and the Prime rate are useful and better than a naïve same-as-last-period forecast for (at least) four quarters into the future. For the BA rate the BER performs marginally better than a naïve model. However, for predicting directional changes in GDP and FCEH, a naïve model performs better than the BER.

THE YEAR‐END EFFECT IN MONEY MARKET YIELDS: BEYOND ONE MONTH AND BEYOND THE CRISIS, Kotomin, V. (2013). THE YEAR‐END EFFECT IN MONEY MARKET YIELDS: BEYOND ONE MONTH AND BEYOND THE CRISIS. Journal of Financial Research36(2), 233-252. U.S. money market yields up to one month have shown changes consistent with year‐end liquidity preferences. I find that three‐ and six‐month negotiable certificate of deposit (CD), Eurodollar deposit (ED), and banker’s acceptance (BA) yields are also affected by year‐end liquidity preferences. Two‐ and three‐month financial commercial paper (CP) yield changes are less pronounced. Banks—CD, ED, and BA issuers—have increased year‐end liquidity needs, unlike finance companies—predominant CP issuers. The year‐end effect disappears after the 2007–2008 crisis as depositories’ cash holdings increase. CD, ED, and CP yields diverge postcrisis, suggesting that investors no longer consider them close substitutes.

Response to Liberalization: Changing Corporate Finance Strategies, Okubo, T. (1985). Response to Liberalization: Changing Corporate Finance Strategies. US-Japan Relations: Learning from Competition, 203.

Was this article helpful?