Determining Banker's Acceptance Discount Rates

A banker's acceptance is a short-term investment that is created by a non financial firm and whose payment is guaranteed by a bank.  A seller in receipt of a Banker's Acceptable will often be able to receive a quote from its bank about the discount rate at which the seller may negotiate the sale of the Banker's Acceptance. 

That discount rate is based on a number of factors including but not limited to (a) the creditworthiness of the customer, the face amount of the transaction, and the market rate of interest for bankers' acceptances. The discount that applies to Bankers' Acceptances depends to some extent on:

• The prevailing market interest rates; 
• The number of days remaining until maturity of the draft;
• The actual marketability of the acceptance; 
• The laws of supply and demand; 
• The interest rate that comparable risks are paying; 
• The interest rate offered on virtually risk free investments (such as federal government securities); 

The prevailing market rate for acceptances is based on the laws of supply and demand. This is turn is affected by a number of factors including general economic conditions, the rates offered on alternate investment or financing instruments, as well as by actions taken by the Federal Reserve Bank and by the federal government.  The number of days remaining on the Note may have a significant influence on the discount rate on the acceptance depending on market conditions and specifically on demand for short, medium, or long maturity acceptances.

In addition to the short-term credit rating of the acceptor, the marketability of the acceptance would also depend upon the classification or category of the Bankers' Acceptance in accordance with standards imposed by the Federal Reserve Bank. The Federal Reserve Bank's regulations influence the discount rate due to the various types of acceptances that the Federal Reserve Bank is willing to purchase or discount, and thus sustain the market.

Edited by Michael C. Dennis, author of "Credit and Collection Handbook."