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 because 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. Investment Banker

    An investment banker is an individual who is primarily concerned ...
  2. Two Name Paper

    A two name paper is a nickname assigned to a legal agreement ...
  3. Time Draft

    A time draft is a form of short-term credit used for financing ...
  4. Mortgage Banker

    A mortgage banker is a company, individual or institution that ...
  5. Mortgage Bankers Association's ...

    The Mortgage Bankers Association’s National Delinquency Survey ...
  6. Acceptance Testing

    Acceptance testing, in the engineering and software industries, ...
Related Articles
  1. Personal Finance

    Private banker: Job description and average salary

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

    Private banker: Career path and 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.
  3. Financial Advisor

    Why Investment Bankers Need Financial Advisors

    Even the most successful investment bankers need financial advisors. Here's why.
  4. Financial Advisor

    Career advice: Financial analyst versus investment banker

    Discover an in-depth comparison between working as a financial analyst versus working as an investment banker. Find out what advice you can get from these two highly prestigious business careers. ...
  5. Personal Finance

    Investment banking versus private banking careers

    Examine the two potential financial career options of investment banking and private banking, with an eye toward choosing the most suitable career.
  6. Financial Advisor

    A day in the life of an investment banker

    Take a look at a day in the life of an investment banker, one of the most sought-after and stressful jobs in the financial sector.
  7. Personal Finance

    4 Reasons Private Banking Is The Right Career For You

    Learn how a strong income potential, good hours, strong client relationships, and low stress might make private banking the ideal career for you.
  8. Insurance

    What is Underwriting?

    Underwriting is a term most often used in investment banking, insurance and commercial banking. Generally, underwriting means receiving a remuneration for the willingness to pay for or incur ...
  9. Personal Finance

    Investment banking versus commercial banking

    Read an in-depth review of the differences between a career in investment banking and a career in commercial banking, including how to decide between them.
RELATED FAQS
  1. Why are insurance companies and pension funds considered financial instruments?

    Find out why insurance companies and pension funds are considered carriers of financial instruments, and what role they play ... Read Answer >>
  2. What's a Typical Day for Someone in M&A?

    Financial professionals in M&A have a very specialized role. Check out their typical duties. Read Answer >>
Trading Center