Banking Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

The financial instrument that is guaranteed by the issuing bank and is used in trade finance is the banker's acceptance. This type of instrument involves a promise from the bank to pay a specified amount at a future date, and it is commonly utilized in international trade to facilitate transactions between importers and exporters.

When a buyer and seller agree on a trade, the buyer can request their bank to guarantee payment for the goods through a banker's acceptance. The bank essentially steps in as a guarantor, assuring the seller that they will receive their payment, which reduces the risk associated with the transaction. This assurance also makes the instrument more attractive to sellers, as they have a credible commitment from a financial institution, allowing them to engage in trade with greater confidence.

In contrast, demand notes, certificates of deposit, and bills of exchange do not function in the same capacity regarding trade guarantees from banks. Demand notes are more like loans that must be repaid on demand, while certificates of deposit are savings instruments that pay interest and are not directly tied to trade finance. Bills of exchange are negotiable instruments but do not inherently carry the same bank guarantee that a banker's acceptance does.