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Test 4 Question 5

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asked Nov 1, 2016 in BUS 1003H - Introduction to Financial Risk by Dumie Nyathi (250 points)
(i) Outline the differences between banker’s acceptances (BAs) and bearer deposit notes
(BDNs).
                                                                                                                       (2)


(ii) TinyCorp is a small business with a bank account. Their starting balance on the 1st
of October was R60,000. On the 11th, 16th, 20th and 31st of October, they deposited
R12,000. On the 12th of October they withdrew R25,000 for payment of a creditor and
on the 25th October they withdrew R80,000 for wages. What was their closing balance
on the 31st ofOctober if the account pays a daily effective rate of 0.02%, and the interest
is deposited in the bank account on the last day of each month?                            (3)

1 Answer

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answered Apr 10 by Richard van Gysen (2,680 points)
 
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Hello Dumi!

i) Banker’s acceptances (BAs) and bearer deposit notes (BDNs) are similar to commercial paper, except they are guaranteed by a third party — a bank. This makes them more secure than commercial paper because in the event that the issuer cannot pay, the bank will step in and pay on their behalf. ? Would a BA be more or less expensive than commercial paper issued by the same company? The difference between BAs and BDNs is that a BA is issued by the company, but carries the “acceptance” (i.e. the guarantee) of a bank. A BDN is issued by the bank, on behalf of the company. The most common term for these instruments is 90 days, though the terms can very from 30 to 180 days.





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