FACULTY OF BUSINESS AND MANAGEMENT

DIPLOMA IN BANKING STUDIES

(BA119)

FUNDAMENTALS OF FINANCIAL MARKETS AND INSTITUTIONS

(FIN250)

GROUP ASSIGNMENT:
BANKER’S ACCEPTANCE (ABs)

PREPARED BY:

NO. NAME NO.MATRIC

1. AINUR NAJWA RAFIEQAH BT AHMAD NORISAN 2022811936

2. DALILA YAMNA BT YUSLI 2022880146

3. NUR AMIRA NATASYA BT AMRAN 2022892578

4. NUR FATHIHAH BT JAINI 2022836582

5. ZALISHA BT ZULKIFLI 2022851818

PREPARED FOR:

SIR WAN MOHD FIRDAUS BIN WAN MOHAMAD

DATE OF SUBMISSION:
 TABLE OF CONTENTS

1.0 Acknowledgement .............................................................................................. 2

2.0 Market Players in Banker’s Acceptance (BAs) .................................................. 3-4
3.0 The Reasons Behind the Issuance of Banker’s Acceptance (BAs) .................... 5
4.0 The Benefits of investing in Banker’s Acceptance (BAs) .................................. 6-7
5.0 Characteristics of Banker’s Acceptance (BAs) .................................................. 8
6.0 Maturity Period of Banker’s Acceptance (ABs) .................................................. 9-10
7.0 Conclusion .......................................................................................................... 11
8.0 References .......................................................................................................... 12
9.0 Appendices .......................................................................................................... 13-14

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1.0 ACKNOWLEDGEMENT

In the name of Allah , the most merciful , the most compassionate . Alhamdulillah all
praises belong to Almighty Allah , the Lord of the world and prayers and peace be upon
Muhammad His Servant and Messenger.

First of all , we must acknowledge my limitless thanks to Allah , the Ever – magnificent , the
Ever – thankful , for His help and blessing by giving us the opportunity , courage and enough
energy to carry out the entire assignment. Without his blessing, all of this can`t be completed on
time.

We also would like to thank our respected lecturer, Sir Wan Mohd Firdaus Bin Wan
Mohamad, whose guidance and help us in completing the given task , without which none of
this work would have been possible. Last but not least, the members of our group, Ainur Najwa,
Dalila Yamna, Nur Amira, Nur Fathihah and Zalisha that give cooperation and efforts in making
the assignment. We are really grateful for each other. May success be ours. Thank you!

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2.0 MARKET PLAYERS IN BANKER’S ACCEPTANCE

Banker’s Acceptance can be defined as a short-term debt instrument that represents a

promised future payment from a bank. The market for banker’s acceptances are typically
consists of the following players:

2.1 Banks

Banks are the most important market players which play a central role in the market for banker’s
acceptance, as they are the issuers of the instrument. The purpose of the used instrument is to
raise short-term funding or to provide financing to their customer. A business entity that wants
to enter into a high-value transaction will approach its banker with an account and provide a
draft.The banker will evaluate the account holder's credibility based on a number of factors,
most notably their credit history. If all the details meet the expectations that the bank has set up,
it will accept the liability on behalf of the account holder. By accepting the draft , the bank is
essentially agreeing to pay the amount of the draft at a future date, which is known as maturity
date and becomes a bank acceptance. When a bank needs to raise their funds, they can sell
the acceptance to investors on the open market. Major banks that are usually involved in issuing
bank acceptances include commercial banks, investment banks and central banks.

2.2 Corporations

A corporation is a type of business entity that is created under the laws of a particular state or
country and is separate from its owners, meaning that it has its own legal liabilities,identity and
assets.Corporation is one of the customers of banks that issue banker’s acceptance.
Corporations are allowed to use bankers' acceptances as a way to finance their operations or to
manage their cash flow. Corporations are usually the entities that request banks to accept
drafts. When a corporation needs to raise their funds, it may do so by issuing a draft, and
sending it to the bank for approval to accept the draft. This process is named as a bank
acceptance, which the corporation can then sell to investors on the open market as a way to
raise funds. Other than that, this process can be done by issuing a commercial paper which are
unsecured and short-term debt securities issued by firms to meet their short-term financial
obligations. The benefit of the proceeds from the bank acceptance sales is that they can
mobilize it to fund various business activities, such as marketing, expansion and research and
development.

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 2.3 Investors

The investors such as insurance companies, pension funds and money market funds are a third
party market player for banker’s acceptance. They may purchase banker’s acceptance when
the banks sell the acceptance on the open market as an initiative to earn a profit by investing
the funds. Investors in bank acceptances consist of individuals, institutional investors and other
banks. For individual investors, they might purchase bank acceptance as a short-term
investment, while the purpose of institutional investors purchase bank acceptance is as a way to
diversify their portfolio. Last but not least, other banks would also purchase bank acceptance to
invest their excess reserves or as a form of short-term lending.

2.4 Credit Rating Agencies

Credit Rating Agencies (CRAs) is an agency that evaluates and rates the creditworthiness of
debt securities and their issuers, including companies,countries and financial instruments.
Ratings indicate the likelihood of a debt or repaying it with interest. These agencies assign
credit ratings to represent the risk of default and financial viability of the debt issuer, based on
quantitative, qualitative, contextual analyses and assess the borrower’s ability to pay the debt.
Higher ratings are generally associated with lower risk, while lower ratings indicate higher risk.
In short, these credit ratings help retail and institutional investors get an idea of their solvency of
the borrower and its products.

2.5 Regulators

Regulators can be defined as persons or organizations that control an activity process and
make certain decisions that it operates as it should, such as the central bank or securities
regulator, may play a role in overseeing the market for banker’s acceptance and ensuring
compliance with relevant regulation. The purpose of regulations is to ensure that the market
operates efficiently and fairly, and to protect investors from fraud or other forms of financial
misconduct. The specific regulation and regulators that apply to bank acceptances will vary
depending on the country or region where the bank acceptance is being issued.

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3.0 THE REASONS BEHIND THE ISSUANCE OF BANKER’S ACCEPTANCE

Instrument issuance can refer to the systematic process followed for issuing financial
instruments such as stocks, bonds, or other securities. This instrument is issued in a company
or government for the purpose of obtaining capital or financing various projects. This issuance
process will usually involve the creation and sale of the instruments to investors. In international
trade transactions, banker's acceptances are usually preferred to be used as financial
instruments. It functions as a form of payment guarantee, with the issuing bank essentially
providing a commitment to pay a specified amount at a future date.

Nonetheless, a common reason that usually occurs behind the issuance of banker's acceptance
is trade financing. It is one way for importers and exporters to guarantee a payment for the
products of goods and services. The transaction's creditworthiness is increased by the
acceptance, which is backed by the bank. It basically helps in bridging the gap between
exporters and importers, by offering a payment mechanism method that is widely accepted and
understood in the global market. Subsequently, secondary markets are actively traded by bank
acceptance. This aims to provide liquidity to both the main parties involved in the transaction as
well as to investors that are seeking short-term instruments in the money market. For instance,
businesses in international trade who have access to choose short-term financing through
banker's acceptance, help a business in managing their cash flow efficiently which in turn gives
them access to funds in a predetermined time. Lastly, in issuance of banker's acceptance there
is also a collaboration between banks. The collaboration is intended to help strengthen the
relationships within the banking sector and fosters trust in the financial system. In addition to
coordinating, communicating and offering guarantees of cooperation can reduce the risk of
importers and exports while facilitating international trade transactions .

To conclude, the issuance of banker's acceptance is driven by various factors that could make it
a versatile financial instrument, particularly in the context of international trade and finance.
After all, banker’s acceptance itself addresses the complexities and challenges by providing
secure and standardized payment mechanisms, to promote financial stability, and support the
efficient functioning of the global financing system.

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4.0 THE BENEFIT OF INVESTING IN BANKER’S ACCEPTANCE

The concept of banker’s acceptance seems to be a blessing for those who require goods and
items from a seller on credit but are unable to make a quick payment. The sellers are more likely
to trust banks when they assume repayment responsibility in the event of a default, which
facilitates smoother transactions.

The typical maturity period for a banker's acceptances is short—a few weeks to several
months. They might be an effective choice for investors who want to protect their money while
earning a profit over a shorter amount of time. The phrase "short-term maturity" describes the
period of time that passes between the date of the bank's acceptance and the day on which the
bank is required to pay the draft's amount (the maturity date). Although bank acceptances
usually have maturities of less than a year, they are considered as a type of short-term debt
instrument. With a bank acceptance, they can be utilized by investors as a short-term
investment or as a source of short-term capital for businesses. Compared to longer-term debt
instruments, bank acceptance has a shorter maturity period, which also makes it less
susceptible to changes in interest rates. Bank acceptances are a common method used by
financial institutions and corporations to raise short-term funds since they are seen as relatively
low-risk investments with a short maturity. They are also popular with investors who want a
liquid and safe investment choice.

Next, banker's acceptances can usually be bought and sold in the market with ease because
they are highly liquid. They could be, therefore, an appropriate choice for investors who might
need to quickly access their money. The ease with which bank acceptance can be purchased or
sold on the open market is referred to as liquidity. In the money market, a part of the financial
system where short-term borrowing and lending occurs, banker acceptances are traded actively.
The investors can easily purchase or sell bank acceptances at prices that are nearly equal to
their market worth. Moreover, quick entry and exit from bank acceptances is made possible by
this, which can be important when market conditions change quickly or when an investor has to
obtain money quickly. The secondary market where bank acceptances are traded has an impact
on their liquidity as well. Bank acceptances can be easily bought and sold by investors and
banks on an active secondary market, assisting in maintaining liquidity.

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Other than that, banker's acceptances may offer a higher yield than some other short-term
investments like money market funds or short-term government bonds. Because of this, they
might be a desirable choice for investors trying to get the best returns. The rate of return that an
investor can anticipate receiving on their investment is referred to as yield. The coupon rate, the
amount of time until the maturity date, and the financial standing of the issuing bank are some of
the variables that affect the yield on a bank acceptance. Bank acceptances with greater coupon
rates will produce more money than bank acceptances with lower coupon rates. Furthermore,
bank acceptance yields and interest rates are tightly related. The interest rate risk refers to their
potential to rise with rising interest rates and fall with falling interest rates.

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5.0 CHARACTERISTIC OF BANKER'S ACCEPTANCE

Banker's Acceptance is a very short- term investment that can be purchased from banks. The
functions are like a post dated check, a bill of exchange to pay a specific amount before its
maturity date. Investor or buyer should know the agreement before starting the business. In
order to make sure, there's no loss or problem to the bank. So, let's see the characteristics and
uniqueness of Banker's Acceptance.

Firstly, short term. It has a short term maturities between the range 21 days to 200 days. This is
very suitable for those who want to get a return from their investment in a short time. Buyers are
free to choose their maturity date. Second, high liquidity which means it can meet its debt
obligations in the short term. We can see that it has a good ability to settle their debt. Third, be
issued by the bank and get a guarantee from the bank on behalf of its customers that a
specified amount can be made at a specific maturity date easily. This can avoid any problems
from happening. Fourth, a discounted instrument where the rates of discount can be around the
inter bank money market rate. The discounted purchase price is considered as interest earned
to customers. It looks like a return from the investment.

Next, it can be a negotiable instrument because it can be sold and transferred to buyers freely
in the market. It is safe and convenient. Sixth, a trade financing facility to buyers and sellers
This can increase the source of working capital and give alternative forms of investment to
investors. Also facilitate international trade and commerce. Seventh, credit quality of banker's
acceptance. Means that the profit or losses must be face and share according to what has been
agreed by both parties. This can give benefits to customers and reduce worry when investing.
The last one is marketability because it can be sold. Since its negotiable Instrument and short
term , it is free to buy or sell to third parties. If a bank has a good reputation, many investors
would like to accept it.

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6.0 MATURITY PERIOD OF BANKER'S ACCEPTANCE

A financial instrument known as a banker's acceptance has a maturity period of usually 30, 60,
90, or slightly longer. This short period is very suitable for its main purpose, which is to facilitate
the financing of rapid trade transactions. Accelerated recovery is in line with the dynamic nature
of international trade, providing a reliable mechanism for the parties involved to meet their
financial obligations efficiently. This maturity is the amount of time that elapses between when
the banker's acceptance is issued and when it matures. Currently, a company that owns a
banker's acceptance can either hold it until maturity or sell it on the secondary market. A fixed
term provides a clear timeline for repayment and adds a level of predictability to financial
transactions involving bankers' receipts.

For companies trading internationally or looking for short-term financing, the banker's
acceptance period is important because it helps them manage their cash flow by letting them
know when funds will be available or when the banker's acceptance can be liquidated. This
simple approach to the period also helps explain why bankers' acceptances are widely used in
the business world to facilitate trading and financing activities.

In summary, fast trade financing is facilitated by a banker's acceptance, which is valid for 30, 60,
or 90 days. This is an efficient way to meet financial commitments, given the speed of
international trade. Fixed time periods give transactions more predictability by guaranteeing a
transparent repayment plan. For enterprises in global trade or in need of short-term money, the
banker's acceptance time is important. It is an easy-to-use cash flow management application
that greatly simplifies trading and financial operations.

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7.0 CONCLUSION

A short-term debt instrument issued by a bank and approved by a bank customer is known as a
banker's acceptance. They are widely used by banks and other financial organizations to
manage their risk and liquidity, as well as by international trade to finance the import and export
of goods and services. The five market participants that make up bankers' acceptance are
banks, corporations, investors, credit rating agencies, and regulators. This issue is mostly
handled in trade finance. It helps exporters and importers get paid for the goods and services
they produce.

In addition, bank approvals drive active trading in the secondary market. Their aim is to supply
liquidity to the two main players in the deal. Banks also use banker acceptance as a
collaboration tool. One advantage of investing in bankers' receivables is that they typically have
short maturities, ranging from a few weeks to a few months. For investors who want to protect
their capital while making profits faster, this can be a smart choice. Finally, because bankers'
receivables are highly liquid and can be easily bought and sold on the market, they can be used
to pay off debts quickly. It is proven that they can pay their debts effectively.

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8.0 REFERENCE

1) CFI TEAM (2022).”Banker’s Acceptance”. Retrieved from Banker’s Acceptance - Overview,

How it Works, Investing Tool (corporatefinanceinstitute.com)

2) James Chen (2022).” Banker’s Acceptance (BA); Definition, Meaning and Types”. Retrieved
from Banker's Acceptance (BA): Definition, Meaning, and Types (investopedia.com)

3) Jevitha Muthusamy (2023).”Financial Regulators: Who They Are and What they Do.
Retrieved from Financial Regulators: Who They Are and What They Do | gradmalaysia

4) Ratnesh Sharma (2022).” Banker’s Acceptance” Retrieved from

https://www.wallstreetmojo.com/bankers-acceptance

5) Daniel Kurt (2021).”Banker Acceptance 101” Retrieved from

https://www.investopedia.com/articles/investing/062013/bankers-acceptance-101.asp

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9.0 APPENDICES

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