Introduction to Finance

banker’s acceptance
is a promise of future payment issued by a fi rm and guaranteed 
by a bank. Banker’s acceptances are used to fi nance international trade and, typically, have 
maturities from one to six months. For example, a U.S. exporter that is sending goods to an 
importer in a foreign country may not know the credit quality of the importer. To facilitate 
the transaction, a bank may be asked to guarantee payment of the “draft” or bill for the goods, 
which will be due at a future date. The “accepted” draft is sent to the exporter. The importer 
pays the amount of the draft, plus a fee for the guarantee, to the bank when due.
The bank, in turn, pays the exporter or whoever is holding the draft at the time of matur-
ity. Exporters often sell their banker’s acceptances at a discount to obtain cash prior to the due 
Treasury bill 
short-term debt 
obligation issued by the U.S. federal 
government
commercial paper 
short-term 
unsecured promissory note issued 
by a high credit–quality corporation
negotiable certifi cate of deposit 
(negotiable CD) 
short-term debt 
instrument issued by depository 
institutions that can be traded in the 
secondary money markets
banker’s acceptance 
promise 
of future payment issued by an 
importing fi rm and guaranteed 
by a bank
FIGURE 2.6
Major Money Market Securities
Type
Typical
Maturities
Issuers
Investors
Secondary
Market
Treasury bills
91 days to 1 year
U.S. government
Individuals, 
business 
firms, 
and 
institutions
High activity
Commercial paper
1 day to 9 months
Business firms 
and 
institutions 
Business firms 
and 
institutions
Moderate 
activity
Negotiable certi-
ficates of deposit
(Negotiable 
CDs)
Up to 1 year
Depository 
institutions
Business firms
Low activity
Banker’s 
acceptances
Up to six months
Banks
Business firms
High activity
Repurchase 
agreements
Up to 1 year
Business firms 
and 
institutions
Business firms 
and 
institutions
No market
Federal funds
1 day to 1 week
Depository 
institutions
Depository 
institutions
No market

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2.7 Measures of the U.S. Money Supply
35
date. There is a very active secondary market for banker’s acceptances, with other business 
fi rms often buying banker’s acceptances as a source of low default risk, high liquidity short-
term investments. We will discuss the process of conducting international trade in greater 
detail in Chapter 6.
A