Which money market instrument is a time draft payable to a seller with payment guaranteed by a bank?

Which money market instrument is a time draft payable to a seller with payment guaranteed by a bank?

• A. Banker’s Acceptances
• B. Commercial Paper
• C. Repurchase Agreement
• D. Treasury Bill

Answer: (A)

Banker's acceptances are time drafts drawn on a bank with the bank guaranteeing payment. In this arrangement, the seller is paid at a future date by the bank’s promise to pay, which reduces credit risk and makes the instrument highly liquid in the money market. This bank guarantee is the defining feature that sets it apart from other short-term instruments. Commercial paper is an unsecured short-term note issued by corporations, not guaranteed by a bank. A repurchase agreement is a collateralized loan transaction, not a time draft. A Treasury bill is a short-term government security sold at a discount and does not involve a bank-guaranteed payment.

Banker's acceptances are time drafts drawn on a bank with the bank guaranteeing payment. In this arrangement, the seller is paid at a future date by the bank’s promise to pay, which reduces credit risk and makes the instrument highly liquid in the money market. This bank guarantee is the defining feature that sets it apart from other short-term instruments.

Commercial paper is an unsecured short-term note issued by corporations, not guaranteed by a bank. A repurchase agreement is a collateralized loan transaction, not a time draft. A Treasury bill is a short-term government security sold at a discount and does not involve a bank-guaranteed payment.