Which financial instrument is a guarantee by a bank providing a negotiable bill?

Which financial instrument is a guarantee by a bank providing a negotiable bill?

• A. Commercial paper
• B. Banker's Acceptance
• C. Certificate of Deposit
• D. Repurchase Agreement

Answer: (B)

The correct response is a banker's acceptance, which is a negotiable financial instrument that represents a promise by a bank to pay a specified amount at a future date. This is essentially a short-term credit investment that is created when a buyer and seller agree on the terms of a transaction, and the bank guarantees the payment to the seller. This guarantee enhances the trust between the two parties, as it assures the seller that they will receive payment for the goods or services even if the buyer fails to pay. A banker's acceptance is helpful in international trade and other business transactions where trust is crucial because it allows sellers to receive immediate payment while still giving buyers time to pay. This instrument is easily transferable, making it negotiable in the financial markets. In contrast, commercial paper is a short-term unsecured promissory note issued by a company, typically used to finance working capital needs. A certificate of deposit is a savings instrument with a fixed term issued by a bank, offering a fixed interest rate. A repurchase agreement is a form of short-term borrowing, where one party sells securities to another with an agreement to repurchase them later at a higher price. The distinct characteristics of a banker's acceptance as a bank-backed tool for guaranteeing payments clarify why it

The correct response is a banker's acceptance, which is a negotiable financial instrument that represents a promise by a bank to pay a specified amount at a future date. This is essentially a short-term credit investment that is created when a buyer and seller agree on the terms of a transaction, and the bank guarantees the payment to the seller. This guarantee enhances the trust between the two parties, as it assures the seller that they will receive payment for the goods or services even if the buyer fails to pay.

A banker's acceptance is helpful in international trade and other business transactions where trust is crucial because it allows sellers to receive immediate payment while still giving buyers time to pay. This instrument is easily transferable, making it negotiable in the financial markets.

In contrast, commercial paper is a short-term unsecured promissory note issued by a company, typically used to finance working capital needs. A certificate of deposit is a savings instrument with a fixed term issued by a bank, offering a fixed interest rate. A repurchase agreement is a form of short-term borrowing, where one party sells securities to another with an agreement to repurchase them later at a higher price.

The distinct characteristics of a banker's acceptance as a bank-backed tool for guaranteeing payments clarify why it