A:

Bills of exchange primarily act as promissory notes in international trade; the seller, or exporter, in the transaction addresses the bill of exchange to the buyer, or importer. A third entity, typically a bank, is party to many bills of exchange to help guarantee payment or receipt of funds. This helps reduce any counterparty risk inherent to the transaction.

Think of a simple bill of exchange like a bank check. The check specifies who receives the funds, how much is paid and the date on which the payment takes place. Many different kinds of bills of exchange can be drafted depending on the demands of the parties involved. Bills are also negotiable instruments that can be bought and sold in secondary market transactions.

Bill of Exchange in International Trade

International trade presents unique risks that are not often present in domestic transactions. There are several reasons for this, such as separate legal jurisdictions and lengthy transportation routes. Most of these trades require currency exchanges, making long-term trade arrangements sensitive to exchange-rate fluctuations.

Traditionally, the exporter or the exporter's bank draws up the bill of exchange and submits the document through the importer's bank; the importer's bank offers a contingent guarantee on the transaction. If the importer dishonors the bill of exchange and fails to make payment, the importer's bank makes the payment and then pursues its customer to be made whole.

Trading Bills of Exchange

As marketable instruments, bills of exchange can be sold to outside parties. Normally, the bill is discounted or sold for an amount that is less than the par value of the contract. Like a bond, the discount tends to be greatest when the maturity date of the contract is farthest away. When tendered by the debtor, the new owner of the bill of exchange receives future payments. The final amount paid through the bill of exchange is unchanged.

RELATED FAQS
  1. What is the difference between a bill of exchange and a bill of lading?

    Understand what a bill of exchange and a bill of lading are and the different purposes they each serve as documents used ... Read Answer >>
  2. Why Do Commercial Bills Yield Higher Than T-Bills?

    Find out why commercial bills have higher yields than T-bills and how it relates to the credit quality of each bill type ... Read Answer >>
  3. What is a forward contract against an export?

    Understand forward exchange contracts in exporting, and learn the purpose of using a forward contract and its advantages ... Read Answer >>
Related Articles
  1. IPF - Banking

    Procrastinator's Guide To Bill Payment

    Avoid punishing late fees and keep your credit score intact with these 10 tips.
  2. Managing Wealth

    Should You Pay Your Bills On Autopilot?

    Now that you can sign up to have your bills paid automatically online, it it a smart way to make your life more efficient? A look at the pros and cons.
  3. Personal Finance

    Automating Your Bill Payments

    Automation can be a painless (and free) way to remove the stress of bill scheduling from your life - if you do it right.
  4. Investing

    Will Australia Do Away With Its $100 Bill?

    UBS analysts suggest that Australia should get rid of its highest denomination bill.
  5. Investing

    How To Read A T-Bill Quote

    If you want buy and sell US Treasury bills, you need to learn to read the quotes.
  6. Investing

    Why Chip Stocks Will Keep Rising

    Chipmaker stocks could climb on back of a hefty 27% spike in North American billings for January.
  7. Investing

    Who Owns The Stock Exchanges?

    As M&A heats up among the exchanges, here's how the market currently looks.
  8. Insurance

    Do This If Health Insurance Doesn’t Cover Your Bills

    Health insurance doesn't pay enough to help the millions of consumers who are drowning in medical debt. Are there any other options to soften the blow?
  9. Personal Finance

    Mortgage Borrowers Face Some Changes With Senate Bill

    If the financial reform bill is approved, changes are coming for mortgage borrowers.
  10. Tech

    What Are Centralized Cryptocurrency Exchanges?

    Most cryptocurrencies like bitcoin, Ripple and Ethereum are traded via centralized exchanges. Here's how.
RELATED TERMS
  1. Cycle Billing

    Cycle billing is the practice of invoicing different customers ...
  2. Bill Announcement

    Bill announcement is a notice informing investors about the next ...
  3. Billing Statement

    A billing statement is a monthly report that credit card companies ...
  4. Descriptive Billing

    A type of credit card billing that includes the date, merchant's ...
  5. Tax Anticipation Bill - TAB

    A tax anticipation bill was a type of short-term Treasury debt ...
  6. Recurring Billing

    Recurring billing is when a merchant automatically charges a ...
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  2. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  6. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
Trading Center