What Is a Banker's Acceptance (BA)?
The banker's acceptance is a negotiable piece of paper that functions like a post-dated check, although the bank rather than an account holder guarantees the payment. Banker's acceptances are used by companies as a relatively safe form of payment for large transactions.
The BA also is a short-term debt instrument, similar to a U.S. Treasury bill, and is traded at a discount to face value in the money markets.
They also are known as bills of exchange.
- The banker's acceptance is a form of payment that is guaranteed by a bank rather than an individual account holder.
- BAs are most frequently used in international trade to finalize transactions with relatively little risk to either party.
- Banker's acceptances are traded at a discount in the secondary money markets.
Understanding Banker's Acceptance
For the company that issues it, a banker's acceptance is a way to pay for a purchase without borrowing to do so. For the company that receives it, the bill is a guaranteed form of payment.
A banker's acceptance requires the bank to pay the holder a set amount of money on a set date. They are most commonly issued 90 days before the date of maturity but can mature at any later date from one to 180 days. They are typically issued in multiples of $100,000.
BAs are issued at a discount to their face value. Thus, like a bond, they earn a return. They also can be traded like bonds in the secondary money market.
There is no penalty for cashing them in early, except for the lost interest that would have been earned had they been held until their maturity dates.
Banker's Acceptance (BA)
BAs as Checks
Banker's acceptances, like certified checks, are a relatively safe form of payment for both sides of a transaction. The money owed is guaranteed to be paid on the date specified on the bill.
The use of BAs is most common in international trade transactions. A buyer with an importing business can issue a banker’s acceptance with a date after a shipment is due to be delivered, and the seller with an exporting business will have the payment instrument in hand before finalizing the shipment.
The person who is paid with a banker's acceptance may hold onto it until its maturity date in order to receive its full value or can sell it immediately at a discount to face value.
Banker's acceptances are a relatively safe form of payment for both sides of a transaction.
Unlike a regular check, a banker’s acceptance relies on the creditworthiness of the banking institution rather than the individual or business that issues it. The bank requires that the issuer meet its credit eligibility requirements, typically including a deposit sufficient to cover the banker’s acceptance.
BAs as Investments
Banks and institutional investors trade banker's acceptances on the secondary market before they reach maturity. The strategy is similar to that used in trading zero-coupon bonds. The BA is sold below face value, at a discount determined by the length of time before the maturity date.
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.