What is a Banker's Acceptance?

A Banker's Acceptance is a written order for a bank to pay a third party. This financial instrument is often used in international trade and acts as a guarantee of payment. When a bank accepts a draft, it essentially endorses the promise made by the drawer to pay the specified amount, providing security for the payee.

The nature of Banker's Acceptances lies in their acceptance by a bank, which adds a layer of creditworthiness and reduces the risk associated with transactions. Consequently, they can be sold or traded in secondary markets, reflecting their liquidity and use in short-term financing.

In contrast to the other options, a Banker's Acceptance is not merely a type of loan; rather, it involves the bank acting on behalf of the drawee. While it does serve a function in negotiations and trading, it is specifically tied to payment obligations rather than being a generic negotiable instrument. Additionally, Banker's Acceptances are distinctly different from a promissory note issued by a government, which entails a commitment to pay back a debt rather than an instrument related to a payment order.