What is the meaning of banker's acceptance (BA)?

banker's acceptance (BA) is a short-term financial instrument that is the unconditional obligation of the accepting bank. Banker's acceptances, or BAs, arise from transactions involving the import, export, transit, or storage of goods, including domestic as well as international transit. For investors, it is very important to realize that the underlying transaction that gives rise to a BA is almost completely irrelevant to the credit quality or the liquidity of the instrument. The actual BA is created at a late stage in the underlying transaction when a bank accepts its obligation to pay the holder of the accepted draft. In other words, when the transaction becomes a BA it becomes an unconditional obligation of the accepting bank. From an investor's point of view, a BA is a bank obligation that has at least the same credit strength as any CD issued by the same bank. Typically, BAs are stronger than CDs because, in addition to the credit strength of the accepting bank, BAs are backed by the credit strength of a drawer; an endorsing bank, if one is involved in the transaction; and usually by the pledge of documents representing ownership of the trade goods and insurance on the goods. BAs do not, however, carry federal deposit insurance. BAs are considered safe, liquid, short-term money market investments. For bank holders of BAs, an additional issue is called eligibility. See: eligible banker's acceptances.