Bankers Acceptance

What is a Banker's Acceptance (BA)?

A bankers acceptance (BA) is a time draft drawn on a bank, typically to finance an international transaction where one party is unwilling to offer their goods or services on credit.  A banker's acceptance is issued by the customer and is an order for the bank to pay a provider of goods a certain amount of money at a predetermined date.  Once the bank accepts this order, they are liable to pay the vendor of services.  Basically, a banker's acceptance enables a customer to use the banks credit rating to finance their trsanction.  The customer will owe the face value of the BA to the bank before the BA will be redeemed by the seller.

Selling Banker's Acceptance's On the Secondary Market

Once the letter of credit has been signed by the bank on behalf of the buyer, the may either hold that BA in its portfolio or sell it on the secondary market at a discount to par (value of the BA when it becomes payable).  Selling a BA in the secondary market is essentially providing the borrower with funds from the money markets.  Remember, there is a time value to money and therefore, the bank will have to discount the BA, similar to a discount note.

Banker's acceptance's are a major part of the money markets, providing liquidity to the seller and low risk interest income to the buyer.  They are typically traded at a spread above the T-bills and this rate is referred to as Banker's Acceptance rates.