Ace the AFP Exam 2026 – Boost Your Financial Wizardry!

When a time draft is acknowledged by an issuing bank under a letter of credit, it becomes a banker's acceptance. This process involves the bank agreeing to honor the time draft at its maturity date, which provides the holder of the draft with a commitment from a reputable financial institution.

A banker's acceptance is essentially a promise by the bank to pay a specified amount to the holder at a future date, thus facilitating trade and enhancing liquidity. It is a vital financial instrument, especially in international trade, as it provides assurance to sellers that they will receive payment after the goods have been shipped.

In contrast, commercial paper refers to unsecured short-term debt instruments issued by corporations, while a promissory note is a written promise to pay a specified amount to a specified party at a certain time. Documentary collections are a process whereby an exporter collects payment for goods delivered, often involving a bank acting as an intermediary, which is distinct from the functionality of a banker's acceptance.