Definition
A banker’s cheque, also known as a bank draft, is a reliable and secure payment instrument issued by a bank on behalf of a customer (payer) to a specific payee. The primary advantage of a banker’s cheque is that it is backed by the issuing bank, which puts a hold on the payer’s account for the cheque amount until it is cashed or deposited. This guarantees the funds to the payee, reducing the risk of cheque bouncing due to insufficient funds.
Examples
Example 1: Real Estate Transaction
John agrees to purchase a property from Mary. To ensure secure payment, John’s bank issues a banker’s cheque for the agreed amount. Mary is assured that the funds are secured by the bank when she deposits the cheque.
Example 2: Trade Payment
XYZ LTD. wants to pay its supplier, ABC Inc., for goods received. To mitigate the risk of non-payment, XYZ LTD. pays via a banker’s cheque. When ABC Inc. receives and deposits the cheque, they are confident that the amount is guaranteed by XYZ LTD’s bank.
Example 3: Tuition Fees
Alice needs to pay her university tuition fees. Given the high amount, the university requires a secure form of payment. Alice’s bank issues a banker’s cheque in favor of the university, ensuring the payment is guaranteed.
Frequently Asked Questions (FAQs)
What is a banker’s cheque?
A banker’s cheque is a cheque issued by a bank on behalf of its customer, guaranteeing payment to the payee by holding the amount on the customer’s account until the cheque is processed.
How does a banker’s cheque differ from a personal cheque?
A personal cheque may bounce if there are insufficient funds in the payer’s account, while a banker’s cheque is guaranteed by the issuing bank, assuring the payee that the amount will be honored.
Can a banker’s cheque be stopped or canceled?
Generally, a banker’s cheque is difficult to stop or cancel once issued, as the bank guarantees the funds. However, exceptions may exist if the cheque is lost or stolen.
Are there fees associated with issuing a banker’s cheque?
Yes, most banks charge a fee for issuing a banker’s cheque. This fee can vary depending on the bank’s policies.
How long does it take to clear a banker’s cheque?
A banker’s cheque generally clears faster than a personal cheque, usually within a few business days, as the funds are guaranteed by the issuing bank.
Related Terms
Bank Draft
A bank draft is synonymous with a banker’s cheque, referring to a payment instrument issued by a bank on behalf of a payer, guaranteeing the funds.
Cashier’s Cheque
A cashier’s cheque is similar to a banker’s cheque but is drawn on the bank’s own funds rather than the amount held in a customer’s account.
Payment Order
A payment order is an instruction to the bank to pay a specified amount from one account to another.
Certified Cheque
A certified cheque is a personal cheque guaranteed by the bank, affirming that the account holds sufficient funds to cover the cheque amount.
Online References
- Investopedia - What Is a Bank Draft and How Does It Work?
- The Balance - Cashier’s Check vs. Bank Draft: What’s the Difference?
Suggested Books for Further Study
- Essentials of Financial Management - Eugene F. Brigham
- Principles of Corporate Finance - Richard A. Brealey, Stewart C. Myers, Franklin Allen
- Fundamentals of Financial Accounting - Fred Phillips, Robert Libby, Patricia Libby
Accounting Basics: “Banker’s Cheque” Fundamentals Quiz
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