19. 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?
Answer: B
A banker's acceptance is a short-term draft drawn on and guaranteed by a financial institution.
A banker's acceptance is specifically designed to facilitate international trade by serving as a promise from a bank to pay a specified amount at a future date, making it a reliable tool for corporations engaged in such transactions.
A) Commercial paper
Commercial paper is an unsecured, short-term debt instrument issued by a corporation to finance its immediate cash flow needs. While it is a short-term investment, it is not guaranteed by a financial institution and is typically not used specifically for international trade transactions.
B) A banker's acceptance
A banker's acceptance is a short-term draft that is guaranteed by a bank, making it a secure option for corporations involved in international trade. It is widely accepted in the market and serves as a promise to pay, which facilitates cross-border transactions.
C) An American Depositary Receipt (ADR)
An American Depositary Receipt is a financial instrument that represents shares in a foreign company and allows U.S. investors to trade shares of foreign companies on U.S. exchanges. It is not a short-term draft nor is it guaranteed by a financial institution, thus making it irrelevant to financing international trades directly.
D) A nonnegotiable certificate of deposit (CD)
A nonnegotiable certificate of deposit is a financial product offered by banks that provides a fixed interest rate for a specific term. It is not a draft or an instrument used for financing trade; rather, it is a savings product that restricts early withdrawals, making it unsuitable for short-term international transactions.
Conclusion
The correct answer, a banker's acceptance, is the only option designed specifically for facilitating international trade and is guaranteed by a financial institution. Other options, such as commercial paper, ADRs, and nonnegotiable CDs, do not meet the criteria of being a draft used in this context, thus confirming that they are not suitable for the question's requirement.