Loading the player...

What is a 'Banker's Acceptance - BA'

A banker's acceptance (BA) is a short-term debt instrument issued by a company that is guaranteed by a commercial bank. Banker's acceptances are issued as part of a commercial transaction. These instruments are similar to T-Bills, are frequently used in money market funds and are traded at a discount from face value on the secondary market, which can be an advantage because the banker's acceptance does not need to be held until it matures.

BREAKING DOWN 'Banker's Acceptance - BA'

Considered negotiable instruments with features of a time draft, banker’s acceptances are created by the drawer and provide the bearer with the right to the amount noted on the face of the acceptance on the specified date. Unlike traditional checks, banker’s acceptances function based on the creditworthiness of the banking institution instead of the individual or business acting as the drawer. Additionally, the drawer must provide the funds necessary to support the banker’s acceptance, eliminating the risk associated with insufficient funds on the part of the drawer.

Banker's acceptances vary in amount according to the size of the commercial transaction. The date of maturity typically ranges between 30 and 180 days from the date of issue, which generally classifies the banker's acceptance as a short-term negotiable instrument. To create a banker’s acceptance, the drawer must meet the eligibility requirements as set forth by the banking institution that serves as the backer in the transaction.

Banker’s Acceptance as Investment Vehicles

Banks or investors often trade these instruments on the secondary market before the acceptances reach maturity. When traded, the instrument is sold below its face value to provide an investor the opportunity to generate a profit from the deal, similar to the trading strategy behind zero-coupon bonds. Banker's acceptances are considered to be relatively safe investments since the bank and the borrower are liable for the amount that is due when the instrument matures.

Banker’s Acceptance and International Trade

Due to their perceived safety, banker's acceptances are regularly used as financial instruments in international trade dealings. This allows international institutions to complete transactions without the need to extend credit. An importing business can issue a banker’s acceptance with a date beyond when the shipment is expected to be delivered, and the exporting business can have a payment instrument in hand before finalizing a shipment. Additionally, a banking institution will not provide a banker’s acceptance without a reasonable likelihood that it is able to provide the funds as specified.

RELATED TERMS
  1. Acceptance Market

    Investment market based on short-term credit instruments. An ...
  2. Two Name Paper

    A nickname assigned to trade paper. Both Trade Acceptances and ...
  3. Bank Endorsement

    An endorsement by a bank for a negotiable instrument, such as ...
  4. Acceptance

    A contractual agreement on a time draft or sight draft to pay ...
  5. Broad Liquidity

    A category of the money supply which includes: all funds in M3, ...
  6. Bankable Funds

    Forms of payment that are accepted at financial institutions. ...
Related Articles
  1. Personal Finance

    Banker's Acceptance 101

    A banker's acceptance, a common way of financing international trade activity, provides a relatively safe, short-term vehicle for investors. An acceptance is a negotiable time draft that a bank ...
  2. Personal Finance

    What Do Investment Bankers Really Do?

    Investment bankers are essentially corporate financial advisors and can help companies manage the process of raising financing for their activities.
  3. Personal Finance

    What Does an Investment Banker Do?

    An investment banker works for a financial institution that helps companies, governments and agencies raise money by issuing securities.
  4. Personal Finance

    Investment Banker: Job Description & Average Salary

    Identify what investment bankers do in a typical work day, learn what skills are needed to be successful and understand how investment bankers get paid.
  5. Personal Finance

    Private Banker: Job Description & Average Salary

    Discover what a career in private banking entails, including a job description, education and training, necessary skills and licensing, and an average salary.
  6. Personal Finance

    Is a Career in Investment Banking Worth It?

    Discover why many finance professionals are wondering whether an investment banking career is worth it. Consider the challenges of this profession.
  7. Personal Finance

    Private Banker: Career Path & Qualifications

    Discover what kind of work private bankers do, and learn more about how you can develop the experience and qualifications required to work in the field.
  8. Financial Advisor

    Career Advice: Financial Analyst Vs. Investment Banker

    Read an in-depth comparison about working as a Financial Analyst vs. working as an Investment Banker, two highly prestigious business careers.
  9. Financial Advisor

    Why Investment Bankers Need Financial Advisors

    Even the most successful investment bankers need financial advisors. Here's why.
RELATED FAQS
  1. Why is marketing important to a company in the utilities sector?

    Find out what a banker's acceptance is, how it works, and why it should be considered a safe and liquid money market instrument. Read Answer >>
  2. How can I look up average banker's acceptance yields?

    Discover what a banker's acceptance note is, how it is commonly used, and where investors can find information on available ... Read Answer >>
  3. How do I obtain a banker's acceptance?

    Find out how to obtain a banker's acceptance, why you should treat it like a short-term loan and when you would most likely ... Read Answer >>
  4. What is the Activities of Daily Living (ADL) hierarchy scale?

    Find out how a banker's acceptance is different than a post-dated check, even though both instruments represent a claim against ... Read Answer >>
  5. Why do long-term care insurers require the loss of two Activities of Daily Living ...

    Find out why an importing or exporting merchant might turn to a banker's acceptance to help facilitate an international trade ... Read Answer >>
  6. What's the average salary of an investment banker?

    Compare average annual salaries of investment bankers based on position. Different levels of the career result in different ... Read Answer >>
Hot Definitions
  1. Revolving Credit

    A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is ...
  2. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
  3. Contango

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation ...
  4. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  5. Acid-Test Ratio

    A stringent indicator that indicates whether a firm has sufficient short-term assets to cover its immediate liabilities. ...
  6. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that ...
Trading Center