Which of the following investments is a short-term draft drawn on and guaranteed by a financial institution that is often used by corporations to finance international trades?
A banker's acceptance is a short-term draft drawn on and guaranteed by a financial institution.
A banker's acceptance is a financial instrument that facilitates international trade by providing a guarantee from a bank, assuring payment at a future date. This makes it an essential tool for corporations engaging in cross-border transactions.
Commercial paper is an unsecured, short-term debt instrument issued by corporations to meet immediate funding needs. While it is a common form of short-term borrowing, it is not guaranteed by a financial institution and is not specifically used for financing international trades, making it distinct from a banker's acceptance.
A banker's acceptance is a short-term draft that is indeed guaranteed by a financial institution, typically used in international trade. It essentially serves as a promise from the bank to pay the holder a specified amount at maturity, making it a crucial financial instrument for facilitating transactions between exporters and importers.
An American Depositary Receipt represents shares in foreign companies traded on U.S. exchanges. While ADRs allow U.S. investors to invest in non-U.S. companies, they are not short-term drafts nor are they specifically related to financing international trades in the way banker's acceptances are.
A nonnegotiable certificate of deposit is a time deposit offered by banks that cannot be transferred or sold in the secondary market. It typically has a fixed term and is not used for international trade financing, distinguishing it from the function of a banker's acceptance.
A banker's acceptance serves as a vital financial instrument in international trade by providing a bank-backed guarantee for payment, distinguishing it from other forms of short-term financing. While commercial paper, ADRs, and nonnegotiable CDs serve their own financial purposes, they lack the specific characteristics that define a banker's acceptance, which is crucial for securing trade transactions between global partners.
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