BANKERS’ ACCEPTANCES (BAs)

A money market instrument: a short-term discount instrument that usually

arises in the course of international trade.
A draft is a legally binding order by one party (the drawer) to a second
party (the drawee) to make payment to a third party (the payee).
A simple example is a bank check—which is simply an order directing a
bank to pay a third party. The three parties don’t have to be distinct.
For example, someone might write himself a check as a simple means of
transferring funds from one bank account to another. In this case, the
drawer and payee are the same person. When a draft guarantees payment
for goods in international trade, it is called a bill of exchange.
Drawer - the person who writes the check, although they must have the
authority to do this.
Drawee – the place (bank) where the check is drawn out of.
Payee - the person who receives the payment when the check has been
cashed by the drawee (bank).
Endorsement of a check.
When a person signs a check to be deposited, they are endorsing that
check and giving permission to the bank for the funds to be taken out of
that account. The name of the payee that is written on the check is also a
kind of way of confirming that person's authority to receive the stated
amount of money into their own account.
A draft can require immediate payment by the second party to the third
upon presentation of the draft. This is called a sight draft. Checks are sight
drafts. In trade, drafts often are for deferred payment. An importer might
write a draft promising payment to an exporter for delivery of goods with
payment to occur 60 days after the goods are delivered. Such drafts are
called time drafts. They are said to mature on the payment date. In this
example, the importer is both the drawer and the drawee.
In cases where the drawer and drawee of a time draft are distinct parties,
the payee may submit the draft to the drawee for confirmation that the draft
is a legitimate order and that the drawee will make payment on the
specified date. Such confirmation is called acceptance—the drawee accepts
the order to pay as legitimate. The drawee stamps ACCEPTED on the draft
and is thereafter obligated to make the specified payment when it is due. If
the drawee is a bank, the acceptance is called a bankers acceptance (BA).
In international trade, bankers acceptances arise in this way:
An importer plans to purchase goods from an exporter. The exporter will
not grant credit, so the importer turns to its bank. They execute an
acceptance agreement, under which the bank will accept drafts from the
importer. In this manner, the bank extends credit to the importer, who
agrees to pay the bank the face value of all drafts prior to their maturity.
The importer draws a time draft, listing itself as the payee. The bank
accepts the draft and discounts it—paying the importer the discounted
value of the draft. The importer uses the proceeds to pay the exporter. The
bank can then hold the bankers acceptance in its own portfolio or it can sell
it at discounted value in the money market.
 
APPLICATIONS:
1. Suppose BA will be paid in 90 days and have a face value of
P1,000,000.00. If the discount yield (DY) is 5%, what is the current price
(CP) and discount price (DP) ?
 
Solution:
CP = FV (1 – M / 360 x DY)
    = 1,000,000.00 (1 – 90 /360 x 0.05)
    = 1,000,000.00 (1 – 0.25 x 0.05)
    = 1,000,000.00 (1 – 0.0125)
    = 1,000,000.00 (0.9875)
    = P987,500.00
DP = 1,000,000.00 – 987,500.00
      = P 12,500.00.
  
2. Yee Long Ting is an exporter. The bill of exchange is accepted by
XYZ Bank, thus it becomes a banker’s acceptance. His BA is
$100,000.00. Determine the amount received by Mr. Yee if there is a
1.5% commission in 6 months, a 7% discount rate for 6 months.
Solution:
Face Amount of Acceptance                               = $100,000.00
Less: 1.5% p.a. commission for 6 months                -      750.00
Amount received by exporter in 6 months              $ 99 ,250.00
Less: 7% p.a. discount rate for 6 months                -    3,500.00
Amount received by exporter at once                      $ 95,750.00
The exporter may discount the acceptance note in order to receive
funds up front.
To get $750.00 [100,000.00 x 0.015 x 6 / 12]
To get $3,500.00 [100,000.00 x 0.07 x 6 / 12]
 
3. Face Value of BA = $1,000,000.00 with a 2% p.a. commission for 1 year.
Determine amount to be received by exporter in 1 year.
Solution:
 
FV of BA                                                      = $ 1,000,000.00
 
Less: 2% p.a. Commission for one year                20,000.00
      Amount received by exporter in one year    $ 980,000.00