ACCA Financial Management (F9) Certification Practice Exam

What primarily defines a Banker's Acceptance (BA)?

1. A short-term investment in government bonds

2. A negotiable instrument guaranteed by a bank

3. A loan agreement between two corporations

4. A form of equity financing

The correct answer is: A negotiable instrument guaranteed by a bank

A Banker's Acceptance (BA) is primarily defined as a negotiable instrument guaranteed by a bank. This financial instrument typically arises when a business needs to secure trade transactions; the bank accepts the liability for the payment of a specified amount at a future date, thereby providing assurance to the seller that they will receive payment. This guarantee from a bank enhances the creditworthiness of the instrument, making it more appealing to investors and lenders. The negotiability aspect is crucial because it allows the instrument to be transferred or sold in the financial markets before its maturity, providing liquidity to the holder. BAs are often used in international trade to facilitate transactions between buyers and sellers who may not be familiar with each other's creditworthiness. In contrast to other options, such as investments in government bonds or equity financing, a Banker's Acceptance specifically involves banking guarantees connected to short-term financing needs rather than static investment or ownership stakes in businesses. Therefore, the defining characteristic of a BA lies in its function as a bank-backed negotiable instrument.