DEFINITION of Acceptance Market
Acceptance market is an investment market based on short-term credit instruments typically used by exporters who prefer to get paid faster for their exported goods. Acceptances are typically used to finance imports and exports between foreign countries and storage of readily marketable staples in foreign countries.
BREAKING DOWN Acceptance Market
An acceptance is a time draft or bill of exchange that is accepted as payment for goods. A banker's acceptance, for example, is a time draft drawn on and accepted by a bank as a common method of financing short-term debts in international trade including import-export transactions. An acceptance is a short-term credit instrument signed by a buyer indicating its intention to pay a specific sum of money to the seller (or exporter) at an agreed date.
The exporter would send the acceptance or bill to the buyer who signs it to affirm his obligation to make good on his payment for the goods bought. The credit instrument has a maturity date which specifies when the buyer must fulfill its obligations. After signing, the buyer returns the bill to the exporter who sells it to a bank at a discount. Thus, the seller receives immediate payment for goods sold even if the buyer has not received the goods, and the buyer does not have to settle payment for the transaction until the goods arrive. In addition, the importer can often obtain physical possession before payment, and also has some time prior to maturity to sell the goods of which the proceeds will be used to settle the debt.
The acceptance market is useful to exporters, who are immediately paid for exports; for importers, who do not need to pay until possession of goods occurs; for the financial institutions, that are able to profit from the acceptances at the spread that ensues between the negotiating rate and the rediscounting rate; and for investors and dealers who trade acceptances in the secondary market. Acceptances are sold in the secondary market at a discount from face value (similar to the Treasury Bill market), at published acceptance rates.