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Money Market: Banker's Acceptance
A bankers' acceptance (BA) is a short-term credit investment created by a non-financial firm and guaranteed by a bank to make payment. Acceptances are traded at discounts from face value in the secondary market.
For corporations, a BA acts as a negotiable time draft for financing imports, exports or other transactions in goods. This is especially useful when the creditworthiness of a foreign trade partner is unknown.
Acceptances sell at a discount from the face value:
| Face Value of Banker's Acceptance |
$1,000,000 |
| Minus 2% Per Annum Commission for One Year |
-$20,000 |
| Amount Received by Exporter in One Year |
$980,000 |
One advantage of a banker's acceptance is that it does not need to be held until maturity, and can be sold off in the secondary markets where investors and institutions constantly trade BAs.
Next: Money Market: Eurodollars
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