Bank Acceptances

Student’s Name
Professor’s Name
Course
Date
Bank Acceptances
“Banker’s acceptances, also known as a bill of exchange is a draft in a commercial bank that mandates a bank to pay the person that holds this instrument, a specific amount, at a specific time, usually a period between one day to 180 days.” (Fabozzi, Mann, and Moorad 31) In most cases, bankers cheques are provided for in discounts but are repaid in the full amount. Interest gained by the banker’s cheque is the difference between the values of the instrument at maturity versus when the instrument was issued. In cases where the instrument is submitted before the due date of maturity, then the interest accrued will not be paid.
Bank acceptances are commonly used in international trade more than in domestic trade as a means of payment. Where importers need to get some merchandise from out of their country, they need to have a letter of credit from their home bank, which they give to the exporters as the means of payment. Letter of credit is the guarantee that the goods imported will be paid for, at a price agreed upon and at a time set by both parties. This means that the exporter will take this letter of credit to their own bank, as a claim for their payment from the importer’s bank. The banks will then sort out the transaction between them before the exporter gets paid. “The exporter’s domestic bank then sends a time draft to the importer’s bank, which then stamps it “accepted” and, thus, converting the time draft into a bankers acceptance.

” (Fabozzi, Mann, and Moorad 94) The whole transaction will also rely on the importer’s promise to pay, the goods bought and a guarantee of payment from the bank.
While these bankers’ cheques are mostly used in the import and export of goods, they can be used in domestic trade. In other cases, there are third-country acceptance, which is used to represent the trade between individuals who are importers or exporters who are neither located in the country. Acceptance financing is also another form of commercial transaction financing that businesses use in imports and exports, by using banker’s acceptance. The bank acceptances are used because they have a low risk of credit due to the backing they get from the importers, their bank and the imported goods in the trade. Therefore, in comparison to Treasuries, bank acceptances offer higher yields than Treasuries. Other forms of money market instruments are also used by most investors, which have created a problem for bank acceptances that have declined considerably.
When a bank charges the bank acceptances, it is dependent on the fees, commissions as well as the general market yields that are provided for in the money market. In cases where bank acceptances are ineligible as collateral in taking out reserve loans, the Federal government will provide reserve requirements on the number of ineligible bank acceptance. Therefore, bank acceptances that are ineligible will be discounted higher, leading to borrowers getting less money than what they initially requested for loan, although the investor gets more yield than the original. In most cases, the banks will borrow from the Federal Reserve. However, for them to be granted these loans, banks are required to make deposits that act as collateral in the Federal bank. In these cases, banker’s acceptances are used as the collateral, long as they are eligible.
Work Cited
Fabozzi, Frank J, Steven V. Mann, and Moorad Choudhry. The Global Money Markets. Hoboken, N.J: J. Wiley, 2002. p.1- 94.