Tuesday, May 12, 2009

Banker's Acceptance

A Banker's Acceptance is letter of credit (a bank 's promise to pay on specific date) that has been stamped as " accepted" (guaranteed) by another bank. You might think of A Banker's Acceptance as analogous to a post-dated "check" or bank draft. If the party issuing the check has insufficient funds in the account to cover the draft when it is payable, the bank that stamped the draft is obligated to pay the amount of the "check" to the party who holds it. Obviously a Banker's Acceptance is more valuable as a medium of exchange than a standard check, since a bank guarantees that the Banker's Acceptance will be honored. the party issuing a banker 's acceptance pays a fee to the bank for its guarantee.
A Banker's Acceptance are particularly valuable in international transactions, since it is extremely costly for firm located in, say, France to recover a bad check from a party located in Egypt. there is a relatively small secondary market for Banker's Acceptance, which essentially operates as a scaled-down version of the market for Treasury bills. that banker is acceptance accounted for only $23 billion of the outstanding money market instruments in 1992.

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