What is a Banker’s Acceptance and when/how does it become a money market instrument?

What is a Banker’s Acceptance and when/how does it become a money market instrument?

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A Banker's Acceptance is a type of money market instrument which represents a guaranteed future payment by the bank. The payment is accepted and promised by the bank as a time draft to be drawn on a deposit. The draft states the amount of funds, the date of the payment and the institution/company to which the payment is owed.

It is necessary to recognize that Banker's Acceptance is a commitment on the accepting bank. Therefore, a payee can sell the bankers acceptance. Selling Banker's Acceptance means selling the time draft, but it will sell at a discount. The discount will be dependant on the time period left for the maturity and goodwill of the bank. Because of this, Banker's Acceptance is tradable in the money market and is an efficient short-term instrument. There is a huge secondary market for these instruments.

jeff jeffy answered 1 year ago

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