Friday, 20 January 2012

Bankers Acceptance

Bankers’ Acceptance:
A bankers’ acceptance (BA) is a short-term debt instrument traded in money markets. The instrument is derived from an underlying commercial transaction and is backed by the credit of the bank that accepted and subsequently sold it. Bankers’ acceptances typically trade at a discount from face value.

Importers and exporters have been using bankers’ acceptances to finance international trade transactions for hundreds of years. Essentially, for a set fee, a bank agrees to finance the purchase of an import order by “accepting” a time draft, or invoice with a set value and specified payment date, from the exporter. By accepting the time draft and creating the bankers’ acceptance, the bank is guaranteeing payment of the invoice amount. The contract created from the transaction is then sold and traded in secondary markets.

Bankers’ Acceptances typically have maturities of 30 days, 90 days, or 180 days. Once the bankers’ acceptance has been accepted by the bank it is backed by the bank’s credit. The tradable instrument is considered separate from the underlying transaction – even if the underlying transaction falls through, the bank is still obligated to pay the face value of the bankers’ acceptance to whomever is holding it at its maturity date. For these two reasons, bankers’ acceptances are considered safe investments and they offer yields comparable to those of certificates of deposit.

Bankers’ Acceptance Illustration:

Let’s say a US importer orders a shipment of fruit from a Panamanian exporter. The importer wants to finance the purchase with a bankers’ acceptance agreement. For a fee, the importer gets the importer’s bank to issue a letter of credit to the exporter’s bank. The exporter’s bank shows the letter of credit to the exporter, and then the exporter ships the fruit.

Once the fruit has been shipped, the exporter sends copies of the shipping documents and the order invoice to the exporter bank. The exporter bank then forwards these documents to the importer bank. Once the importer bank “accepts” the invoice, or agrees to pay the amount due at the specified date, the bankers’ acceptance (BA) has been created. The importer is now allowed to collect the fruit shipment.

The exporter can then choose to discount the BA, or accept early payment at a discount to face value from the importer bank. If so, then the bank pays down the invoice and gets the BA back. The BA now represents the money the importer owes to the importer bank. This money is due at the maturity date of the BA.

The bank can hang on to the BA until it matures, or it can sell the BA in the secondary markets. After selling it in the secondary markets, it trades among investors and whoever possesses the BA at maturity collects payment from the bank (after the bank has collected payment from the importer). The bank profits from the fees it charges for facilitating the transactions and financing the importer’s purchase, and also from selling the BA at a slight premium above what it paid for the invoice.


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