Fixed Income Tutorials
- Fixed Income
- Bond Pricing
- Bond Pricing Formula
- Bond Sinking Fund
- Yield Curve
- Convexity of a Bond
- Debt Covenants
- Negative Covenants (Restrictive)
- Credit Analysis
- Credit Analyst Career
- Credit Analyst Interview Questions and Answers
- Credit Rating Process
- Credit Spread
- Asset Backed Securities
- ABS and MBS Index
- Loss Given Default â€“ LGD
- Secured Loans
- Unsecured Loans
- Secured vs Unsecured Loan
- Subordinated Debt
- Subordination Debt
- Payment in Kind Bond
- Promissory Notes
- Sinking Fund
- Junior Tranche
- Fallen Angel
- Bills of Exchange vs Promissory Note
- Bonds vs Debentures
- Bills of Exchange
- Negotiable Instruments
- Bond Equivalent Yield Formula
- Equity Research vs Credit Research
- Books on Bonds Market
- Treasury Management Book
- Fixed Income Books
- Credit Research Books
What are Bills of Exchange?
Bills of exchange are negotiable instruments which contain an order to pay a certain amount to a particular person within a stipulated period of time. Bill of exchange is issued by the creditor to the debtor when the debtor owes money for goods or services.
The most important part of a bill of exchange is that it needs to be accepted by the debtor before we can call it valid. If the debtor doesn’t accept it, it doesn’t have any value. Once the debtor accepts the bill of exchange, it is levied on the debtor to pay off the amount due to the creditor.
If the debtor fails to pay the amount within a specific time period mentioned in the bill of exchange, the bill is dishonored. And when the bill is dishonored, a notice is issued to all the parties involved mentioning that the bill that has been issued is dishonored.
The parties involved in the transaction are drawer, drawee, and payee.
Bills of Exchange Example
Let’s take a couple of examples to illustrate the meaning of bills of exchange.
Bills of Exchange Example#1
Let’s say that Mr M has issued a bill of exchange for Mr B who has purchased goods of $100,000 from Mr M. The bill is issued on 05.10.2017. It is the same date when the goods are purchased on credit. But Mr B didn’t accept the bill on the same date. Rather he accepted the bill on 10.10.2017.
In this situation, we can see that Mr M has issued a bill. Mr M here is a creditor to Mr B. Mr B is a debtor who has purchased goods from Mr M on credit.
So when Mr M has issued the bill, Mr B didn’t accept it immediately. Mr M has issued the bill on 05.10.2017 and Mr B accepted it on 10.10.2017. During these 5 days till 10th of October, 2017, we cannot call the bill issued by Mr M as bill of exchange. Rather we will only be able to call it a mere draft. But when Mr B accepted the bill i.e. on 10.10.2017, that date onward we will call the bill, a bill of exchange.
Bills of Exchange Example#2
Let’s say that ABV Company has issued a bill for BVX Company. BVX Company has purchased goods worth of $20,000 from ABV Company on credit. ABV Company writes that – “Three months after the date, pay to us a sum of twenty thousand dollars.” BVX Company has accepted the bill, but on a due date couldn’t pay the amount due.
In this case, ABV Company’s bill would be called “dishonored”. And for that, all of the parties involved here will be issued a notice which would mention that the bill has been dishonored.
Features of Bills of Exchange
Let’s look quickly at the most important features of bills of exchange –
- The bills of exchange should be in writing format. No verbal note would be considered as valid.
- The bills of exchange would be an order for the debtor to pay the amount within a certain period of time. And the order would have no other conditions.
- The amount that needs to be paid and the date within which the amount must be paid should be precise in the bills of exchange.
- The payment should be made by the issuer of the bill by the bearer of the bill.
- Lastly, after articulating every detail on the bill, the creditor who has issued the bill should sign the bill before sending it to the creditor.
Parties involved in the bills of exchange
We have already mentioned the parties involved in the bills of exchange. Here, in this section, we will understand in detail the inherent meaning of drawer, drawee, and payee.
- Drawer: In simple terms, the person who issues the bill is the drawer. The drawer is the creditor who is yet to receive money from the debtor.
- Drawee: Drawee is the person to whom the bill is issued. Drawee is also the purchaser of goods on credit. We can say that drawee is the debtor who needs to pay the amount to the creditor.
- Payee: The person to whom the payment is made is called the payee. Usually, the payee and the drawer are the same person.
This has been a guide to what is Bills of Exchange, its meaning along with examples of bills of exchange. Here we also discuss parties and features of bills of exchange. You may also have a look at the following recommended articles on the fixed income –