Banker's acceptance

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A banker's acceptance is a bank’s promise to pay a specific amount on a future date. It helps buyers and sellers who don’t know or trust each other because the bank’s credit backs the payment.

How it works: The buyer deposits enough money to cover the future payment plus fees. A time draft is drawn on that deposit for the payment date. The bank accepts the draft, guaranteeing payment when due. The holder can keep the acceptance until it matures or sell it to someone else at a discount.

Banker’s acceptances can be traded before they mature, which makes them useful in international trade where parties may not be creditworthy for direct payment.

Typical terms: they are usually issued in large amounts (often $100,000 or more) and mature in 1 to 6 months.

Pricing: the market sets the rate for banker's acceptances, including any bank fees. If the holder sells the acceptance before maturity, the sale price is typically less than the face value. The difference—called the bank’s gain—compensates the bank for taking on the risk and the service.