You purchased a 270-day $1,000,000 banker's acceptance (BA) six months ago at a discount rate of 6.75%. You sell it today, with 90 days remaining to maturity, at a discount rate of 5.95%. a) What is your rate of return? Use 360-day to annualize. b) What 90-day discount rate when selling the BA today will yield a rate of return of 10% instead of the one obtained in question (a)? c) Explain why a BA is conisdered an off-balance sheet item?
| You purchased a 270-day $1,000,000 banker's acceptance (BA) six months ago at a discount rate of 6.75%. | |||
| You sell it today, with 90 days remaining to maturity, at a discount rate of 5.95%. | |||
| a) What is your |
| b) What 90-day discount rate when selling the BA today will yield a rate of return of 10% instead of the one obtained in question (a)? |
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c) Explain why a BA is conisdered an off-balance sheet item?
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A banker's acceptance (BA) is a time draft, or a written order, that is signed by an importer's or exporter's bank. It represents an unconditional promise by the bank to pay the holder of the draft a certain amount of money at a specified date in the future. BAs are used as a financing mechanism in international trade, with the bank acting as an intermediary between the importer and the exporter. When an exporter presents the draft to a bank, the bank agrees to pay the exporter the face value of the draft, minus a discount that represents the bank's fee for providing the service. The bank then holds the draft until the maturity date, when it presents the draft to the importer's bank for payment. BAs are often used to provide assurance to the exporter that it will receive payment, while providing financing to the importer.
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