what is a banker s acceptance ba 
a banker s acceptance ba is a negotiable piece of paper that functions like a post dated check a bank rather than an account holder guarantees the payment banker s acceptances are also known as bills of exchange they re used by companies as a relatively safe form of payment for large transactions bas can also be short term debt instruments similar to u s treasury bills that trade at a discount to face value in the money markets 1investopedia sydney burnsunderstanding banker s acceptancea banker s acceptance is a way for the company that issues it to pay for a purchase without borrowing to do so the bill is a guaranteed form of payment for the company that receives it a banker s acceptance requires that the bank pay the holder a set amount of money on a set date bas are most commonly issued 30 days before the date of maturity but they can mature at any later date from one to 180 days 2bas are issued at a discount to their face value they earn a return like a bond does they also can be traded like bonds in the secondary money market there s 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 history of banker s acceptancebanker s acceptances have been around since the 12th century they were used as a method of facilitating trade bas started to become an actively traded market in london in the 18th and 19th centuries 3the u s launched the federal reserve in the early 1900s to help create banker s acceptances that would compete with london s the fed s goal was to boost u s trade and it was given the authority to purchase certain bas the fed still buys government bonds but it no longer buys bas go to a bank that you have a good working relationship with if you re looking to obtain a ba not all banks offer them banker s acceptance as checksbanker s acceptances are a relatively safe form of payment for both sides of a transaction just like certified checks 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 an individual who s paid with a banker s acceptance can hold onto it until its maturity date to receive its full value or they 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 a banker s acceptance relies on the creditworthiness of the banking institution rather than the individual or business that issues it unlike a regular check the bank requires that the issuer meet its credit eligibility requirements typically including a deposit sufficient to cover the banker s acceptance banker s acceptance as investmentsbanks 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 that s determined by the length of time remaining 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 s due when the instrument matures advantages and disadvantages of a banker s acceptanceone of the key advantages of a banker s acceptance is that it s backed by a financial institution and therefore protected against default this gives the seller assurances related to payment buyers are afforded the ability to make purchases in a timely manner and not worry about having to make payments in advance the key risk for the bank is that the financial institution will have to make good on the promised payment if the buyer defaults the bank may require the buyer to post collateral to help hedge against this it provides the seller with assurances against default the buyer doesn t have to prepay or pay in advance for goods it provides the ability to purchase and sell goods in a timely manner it has a relatively low cost compared to the hedge or benefit provided the bank may require the buyer to post collateral before issuing a banker s acceptance the buyer may default forcing the financial institution to make the payment 