Bankers Acceptance

From Open Risk Manual


Bankers Acceptance. A short-term debt instrument issued by a company that is guaranteed by a Commercial Bank

Considered negotiable instruments with features of a time draft, bankers' 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, bankers' 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 bankers' acceptance, eliminating the risk associated with insufficient funds on the part of the drawer.

In a large and active market, investors purchase and sell bankers' acceptances at rates similar to, and often below, LIBOR. Rates are low due to the low Default Risk on the part of a financial institution and the fact that there is generally an underlying trade transaction, the proceeds of which are pledged to cover the acceptance when it matures.


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