Banker's Acceptance

Financial instrument of an entity stating that payment is guaranteed by a bank; commonly used in foreign trade. A banker's acceptance is a short-term credit investment created by a nonfinancial firm and guaranteed by a bank. Banker's acceptances are traded at a discount from face value in the secondary market. For corporations, a banker's acceptance acts as a negotiable time draft for financing imports, exports, or other transactions in goods. They are especially useful when the creditworthiness of a foreign trade partner is unknown. One advantage is that they do not need to be held until maturity. Instead they can be sold off in the secondary markets, where investors and institutions constantly trade them. See also trade acceptance and commercial paper and draft.