“Banker’s acceptances, also known as a bill of exchange is a draft in a commercial bank that mandates a bank to pay the person that holds this instrument, a specific amount, at a specific time, usually a period between one day to 180 days.” (Fabozzi, Mann, and Moorad 31) In most cases, bankers cheques are provided for in discounts but are repaid in the full amount. Interest gained by the banker’s cheque is the difference between the values of the instrument at maturity versus when the instrument was issued. In cases where the instrument is submitted before the due date of maturity, then the interest accrued will not be paid.
Bank acceptances are commonly used in international trade more than in domestic trade as a means of payment. Where importers need to get some merchandise from out of their country, they need to have a letter of credit from their home bank, which they give to the exporters as the means of payment. Letter of credit is the guarantee that the goods imported will be paid for, at a price agreed upon and at a time set by both parties. This means that the exporter will take this letter of credit to their own bank, as a claim for their payment from the importer’s bank. The banks will then sort out the transaction between them before the exporter gets paid. “The exporter’s domestic bank then sends a time draft to the importer’s bank, which then stamps it “accepted” and, thus, conve…
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