AU Wom Assess hub@icms th 3. On-line C Chegg Google L attempt.php?attempt-71420&
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AU Wom Assess hub@icms th 3. On-line C Chegg Google L attempt.php?attempt-71420&page; 8 EGUIDE STUDENT DECLARATION FORM LIBRARY Q? 01 Business Finance courses / FIN201 / Assessments / 3.On-linequiz. elements review (1096) All Events P/A. requires short term financing of approximately $350,000. All Events has asked BankWest to act as the acceptor of the commercial bill with the bill to be repaid in 90 days. a) Outline the role and the possible benefits of the an acceptor in the issue of a commercial bilit? b) How does the return on on investment on a bank accepted commercial bill compare to that of a negotiable certificate of deposit? ut of Next p Previous pageExplanation / Answer
Answer) The acceptor is the third party who accepts responsibility for payment in a bill of exchange. The bill of exchange will generally have three parties: the drawor, the drawee and the acceptor.
Acceptor and Other Commercial Banking Services
In addition to taking responsibility for checks, most commercial banks offer a wide range of services to its customers (both individuals or retail customers, along with enterprise or business customers). Commercial banks accept deposits, offer a suite of checking account services, and make business, personal and mortgage loans. With a residential mortgage loan, for example, a home buyer will pledge his house to a bank. The bank then has a claim on the house in the event that the home buyer defaults on making regular mortgage payments. The bank may evict the tenant(s) and sell the house In the case of a foreclosure,
In addition commercial banks offer basic financial products like certificates of deposit (CDs) and savings accounts. These are distinct from some more complex financial products that investment banks or asset managers sell, such as derivative securities.
When a commercial bank lends money to a customer, it charges a rate of interest that is higher than what the bank pays its depositors. This spread, known as net interest income, is how commercial banks generate revenues, along with charging additional service fees.
Acceptor, Commercial Banks, and Capital Requirements
Depository institutions have capital requirements, which regulatory agencies, such as the Bank for International Settlements, the Federal Deposit Insurance Corporation or the Federal Reserve Board set in place. These capital requirements ensure that banks have enough capital to honor withdrawals if they sustain operating losses. Adhering to capital requirements ensures that a bank will be able to act as an acceptor, taking responsibility for checks customers present.
The 2008 global financial crisis precipitated the passing of the Dodd-Frank Act of 2010, which ensured the largest U.S. banks would maintain enough capital to withstand systematic shocks and not default. A default of several major commercial banks could cause catastrophe for retail customers and higher net worth customers alike.
Answer) Commercial bills are unsecured, short-term debt issued by a corporation, often times for the financing of short-term liabilities and inventory. Like treasury bills, commercial bills also have a market of their own. The latter bills are issued by firms engaged in business. Generally, they are of three- month maturity. They are like postdated cheques drawn by sellers of goods on the buyers of goods for value received.
The bank charges acceptance commission and assumes responsibility of making the payment if the drawee defaults. Once the bill has been so accepted, it becomes a marketable instrument. On receipt, the drawer can now sell it in the market for cash. Again, a bank normally comes into picture. The drawer goes to his bank and gets the bill discounted.
This simply means that he sells it for cash to the bank, which pays him the face value of the bill, less collection charges and interest on the amount for the remaining life of the bill. The rate of interest charged is known as the discount rate on bills. At the time of selling the bill, the seller (drawer) endorses the bill in favour of the buying bank.
This makes him liable to meet the bill at maturity should the drawee (or his ‘accepting’ bank) fail to do so. Thus, the buying bank is protected against the risk of default. If need be, this bank can later sell the bill to some other bank or get it rediscounted with the RBI.
Thus, bills are a very important device for providing short-term finance to trade and industry. They have a fixed term to maturity called usance. This usance is reasonably short for banks to invest their funds in them and reasonably long for the buyers of goods (drawees of bills) to recover the cost of goods from their resale or processing and sale. The latter consideration makes bills self-liquidating. This reduces considerably the risk of default on bills. Moreover, bills are marketable paper, that is, they can be resold any number of times in the money market.
They also carry competitive rate of interest. For all these reasons, banks have a preference for investment in such bills. In the past, several monetary economists were of the view that banks should invest only in bills. This view is known as the ‘real bills doctrine’ in the literature. But most economists have regarded it as an extreme view.
One good asset should not monopolies the show. Also, during periods of business recession or credit squeeze the expected sales or receipts may not materialise and drawees may find it difficult to honour their bills. Thus, the self-liquidating character of bills is a fair-weather friend.
A negotiable certificate of deposit (NCD) is a certificate of deposit with a minimum face value of $100,000, and they are guaranteed by the bank and can usually be sold in a highly liquid secondary market, but they cannot be cashed in before maturity. Due to their large denominations, NCDs are bought most often by large institutional investors, and these institutions often use these as a way to invest in a low-risk, low-interest security.
Participants in the market are comprised primarily of wealthy individuals and institutions. Institutions include corporations, insurance companies, pension funds and mutual funds. It attracts those seeking a return on cash in a low-risk and liquid investment.
Safety
A feature of the NCD is its low risk. NCDs are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor per bank. This was increased from $100,000 in 2010 with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Therefore, the product attracts those who would invest in other low-risk investments, such as U.S. Treasury securities.
Callable NCDs
Most NCDs are not callable, meaning the bank cannot redeem the instrument prior to the maturity date. However, if a bank can call the NCD, it will do so when interest rates fall. Hence, investors will have difficulty finding another NCD that pays a similar rate of interest. The initial rate to the NCD holder will be higher to compensate the investor for this risk.
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