Bankers' acceptances are financial instruments used in international trade transactions. They are essentially a guarantee from a bank to pay a specified amount at a future date. When a company needs to make an international payment, it may use a banker's acceptance to ensure the recipient receives the funds. A disadvantage of banker's acceptances is that they are issued in odd denominations. By “odd denominations,” it means that bankers' acceptances are not issued in standard or commonly used denominations. This makes it challenging for investors or buyers to trade or resell these securities. Other disadvantages include the income being taxable and their limited availability at specific maturities.

A is incorrect. A limited resale market is a disadvantage of short-term municipal obligations.
C is incorrect. Bankers' acceptances are not characterized by "low yields relative to other financial instruments."
D is incorrect. Bankers' acceptances typically have less price risk compared to Treasury bills (T-bills).

Things to Remember

• Bankers' acceptances are commonly used in international trade transactions as a form of payment guarantee.
• Bankers' acceptances are typically issued by a bank on behalf of a customer for a specific amount and maturity date.
• Bankers' acceptances are considered to be low-risk investments due to the backing of a bank.
• Bankers' acceptances are often used to facilitate import/export transactions and can be discounted or sold in the secondary market.
• Investors should be aware of the credit risk associated with the bank issuing the acceptance.