Which statement about acceptance credits is true?

Which statement about acceptance credits is true?

• A. Bank guarantees payment to the supplier.
• B. Bank accepts the instrument drawn upon by its customer and then sells it into a secondary market at a discount, passing the proceeds to its client; the bank then pays the bill at face value.
• C. Bank purchases goods on behalf of the client and extends credit.
• D. Bank issues a promissory note.

Answer: (B)

Acceptance credits are a form of trade finance where a bank steps in to guarantee payment on a bill of exchange drawn by the seller and then provides liquidity for the seller by discounting that accepted instrument. The bank formally accepts the draft drawn on its customer, committing to pay the face value at maturity. It can then sell this accepted bill in the secondary market at a discount to obtain cash immediately for the seller. At maturity, the bank pays the bill’s face value to the holder. This arrangement gives the seller ready cash and reassures the buyer that payment will be made, relying on the bank’s creditworthiness. The other statements describe different banking arrangements (guarantees, simply extending credit, or issuing promissory notes) and do not describe acceptance credits.

Acceptance credits are a form of trade finance where a bank steps in to guarantee payment on a bill of exchange drawn by the seller and then provides liquidity for the seller by discounting that accepted instrument. The bank formally accepts the draft drawn on its customer, committing to pay the face value at maturity. It can then sell this accepted bill in the secondary market at a discount to obtain cash immediately for the seller. At maturity, the bank pays the bill’s face value to the holder. This arrangement gives the seller ready cash and reassures the buyer that payment will be made, relying on the bank’s creditworthiness. The other statements describe different banking arrangements (guarantees, simply extending credit, or issuing promissory notes) and do not describe acceptance credits.