Series 7 practice questionmediumMoney Market — Banker's Acceptances
A banker's acceptance is commonly used to:
- AFinance domestic consumer loans
- BReplace cashier's checks for retail transactions
- CProvide long-term capital for bank expansion
- DFacilitate international trade transactions by guaranteeing payment✓ Correct answer
Explanation
Why D — Facilitate international trade transactions by guaranteeing payment
Banker's acceptances (BAs) are short-term drafts drawn on and guaranteed ('accepted') by a bank, primarily used to facilitate international trade. When a bank accepts the draft, it guarantees payment at maturity, making the instrument highly creditworthy. BAs trade at a discount in the money market and typically have maturities of 30 to 180 days. They reduce risk for both the importer and exporter in international transactions.
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