To determine the amount the exporter will receive when discounting the banker's acceptance (BA) with the importer's bank, follow these detailed steps:
1. Calculate the Acceptance Commission:
The acceptance commission is charged by the bank for issuing a banker's acceptance. It is given as a percentage of the face value of the BA.
- Face Value (Amount) = [tex]$2,000,000
- Acceptance Commission Rate = 1.25%
Acceptance Commission = Face Value × Acceptance Commission Rate
= $[/tex]2,000,000 × 1.25/100
= [tex]$2,000,000 × 0.0125
= $[/tex]25,000
2. Calculate the Amount After Commission:
This is the amount available after the acceptance commission has been deducted from the face value of the BA.
Amount After Commission = Face Value - Acceptance Commission
= [tex]$2,000,000 - $[/tex]25,000
= [tex]$1,975,000
3. Calculate the Discount Rate for 90 Days:
The discount rate is the market rate adjusted for the given period (90 days).
- Market Rate for 90 Days = 7%
- Time Period = 90 days
- A banker's year is often assumed to be 360 days.
Discount Rate = Market Rate × (Time Period / Days in Year)
= 7/100 × (90 / 360)
= 0.07 × 0.25
= 0.0175 or 1.75%
4. Calculate the Discount Amount:
The discount amount is the interest cost for the period, which is deducted from the amount after commission.
Discount Amount = Amount After Commission × Discount Rate
= $[/tex]1,975,000 × 0.0175
= [tex]$34,562.5
5. Calculate the Amount the Exporter Will Receive:
Finally, subtract the discount amount from the amount after the commission to find the amount that the exporter will actually receive.
Amount Received = Amount After Commission - Discount Amount
= $[/tex]1,975,000 - [tex]$34,562.5
= $[/tex]1,940,437.5
So, the amount the exporter will receive when discounting the banker's acceptance with the importer's bank is $1,940,437.50.
