Economics Homework Help

1- A banker’s acceptance refers to a financial instrument that represents a promised future payment from a bank (Anderson, 2009). It states the name of the entity to which the funds need to be transferred, along with the amount and date of payment. Banker’s acceptance are short-term instruments that generally come with a maturity between 30 days and 180 days. The application process for a banker’s acceptance is similar to that short-term loan and involves various credit and collateral checks (Anderson, 2009).

Acceptances arise most often in connection with international trade: U.S imports and exports and trade between foreign countries. An importer may request acceptance financing from its bank as is frequently the case in international trade (LaRoche, 2008). Once the importer and bank have completed an acceptance agreement, in which the bank agrees to accept drafts for the importer and the importer agrees to repay any drafts the bank accepts, then draws a time draft on the bank. In addition, the bank may hold the acceptance in its portfolio, or it may sell, or rediscount it in the secondary market (LaRoche, 2008).

Moreover, an importer enters a transaction with the exporter from another country. The exporter is ready to supply the whole quantity until the port of the importer country. However, the exporter needs an assurance of payment (Anderson, 2009). On the other hand, the importer is doubtful whether the exporter will supply the goods with the correct quantity and of appropriate quality after the full payment is made to the exporter (Anderson, 2009).

References

Anderson, R, G. (2009). Bankers’ acceptances: yesterday’s instrument to restart today’s credit markets? Economic Synopses. P 2-9. Bankers Acceptances: Yesterdays Instrument to Restart Todays Credit Markets? (stlouisfed.org)

LaRoche, R. (2008). Banker acceptance. Federal Reserve Bank of Richmond. p 128-129. Instruments of the Money Market (richmondfed.org)

2-Hello, very good afternoon Professor and classmates,

A banker’s acceptance, or BA, is a promised future payment, or time draft, which is accepted and guaranteed by a bank and drawn on a deposit at the bank. The banker’s acceptance specifies the amount of money, the date, and the person the payment is due (Eiteman, & Moffett, et., al.,2021). After acceptance, the draft becomes a total liability of the bank. The holder of the draft can sell (exchange) it for cash at a discount to a buyer who is willing to wait until the maturity date for the funds in the deposit.

A banker’s acceptance starts as a time draft drawn on a customer’s bank deposit to pay money at a future date, typically within six months, analogous to a post-dated check.

Next, the bank accepts (guarantees) payment to the holder of the draft, similar to a post-dated check drawn on a deposit with over-draft protection (Hogan & Pan, 2015). The party that holds the banker’s acceptance may keep the acceptance until it matures, allowing the bank to make the promised payment by a specific time frame (Eiteman & Stonehill, 2021). This may sell the approval at a discount today to any party willing to wait for the face-value payment of the deposit on the maturity date. The rates they trade, calculated from the discount prices relative to their face values, are bankers’ acceptance rates or discount rates, as they are also called (Arestis & Jia, 2020). With these discount rates, as well as the face values, are calculated precisely.

The banker’s acceptance rate with a financial institution’s commission added in is called the all-in rate. Bankers’ acceptance is attractive to the exporter because they can sell these bankers’ acceptance to a discount as of the present and wait until the maturity date comes into play and the face value of the maturity date will rise (Hagiwara, 2019). It generates profits from the bank since the bank solicits a fee for this service. This way, the exporter generates money, and the banks that give out these bank acceptances (BA). With these bankers’ exchange rates, they have strong validity for both parties’ investment and profit. Therefore it is seen as attractive to the exporters.

References

Arestis, P., & Jia, M. M. (2020). Financing housing and house prices in China. Journal of

Financial Economic Policy, 12(4), 445-461. http://dx.doi.org/10.1108/JFEP-04-2019-0072

Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2021). Multinational Business Finance. Pearson.

Hagiwara, S. (2019). WHY DID THE WORLD ECONOMIC CRISIS OF 2008–2009 END IN

THE GREAT RECESSION?: A Critical Comparison of the Great Depression and the Great

Recession. World Review of Political Economy, 10(1), 24-39.

https://www.proquest.com/scholarly-journals/why-did-world-economic-crisis-2008-2009-

end-great/docview/2288652684/se-2?accountid=35796

Hogan, T. L., Meredith, N. R., & Xuhao (Harry) Pan. (2015). Risk-based capital regulation

revisited: evidence from the early 2000s. Journal of Financial Regulation and

Compliance, 23(2), 115-134. http://dx.doi.org/10.1108/JFRC-02-2014-0006

3-Hi Professor and classmates,

To define a banker’s acceptance is basically a transaction that involves substituting a bank’s creditworthiness for a borrower. This instrument itself is one species of a bill of exchange; for example, an order to pay an amount of money at a specified time. Keep in mind that it is different from other bills because it bears the unconditional promise of a bank to pay the draft at maturity. Usually, a buyer does not pay cash for a delivery of goods but involves credit until the goods are sold. To an extend it presents a problem for a seller who is poorly equipped to appraise the creditworthiness of the buyer. In addition to, the seller may need immediate payment a bank familiar with the buyer’s business can act as an intermediary between the two trading partners by assuming the responsibility of making the payment for the goods on the buyer’s behalf (New York Fed, 1981).

Since its greater ability to assess the buyer’s creditworthiness, the bank might be willing to assume the risk that the buyer may not be able to repay it. In a typical acceptance transaction, the bank guarantees payment by “accepting” a time draft drawn on it by the seller. By accepting such a time draft, the bank assumes an unconditional liability to pay the seller regardless of whether the buyer reimburses the bank or not. The bank specifies its willingness to do so by stamping the draft “accepted” and affixing the signature of an officer authorized to sign for the bank. If the bank is willing to provide its guarantee, it notifies the seller that a letter of credit has been issued on behalf of the buyer authorizing the seller to draw a draft on the bank for an indicated dollar amount (New York Fed,1981).

This is win-win situation for all parties involved because they all secure a payment. For example, the buyer will have a line of credit for future transactions. The seller will secure an account receivable, and the bank will expand its earnings buy charging an interest to the buyer.

Reference

New York Fed, (1981). Bankers’ acceptances. New York Fed. Retrieved October 21, 2021, from https://www.newyorkfed.org/medialibrary/media/research/quarterly_review/1981v6/v6n2article6.pdf.