10.5 Bills of exchange

Question 1

What is another name for a bill of exchange?

Answer 1

A trade draft.

Question 2

What is meant by a “draft”?

Answer 2

A non-interest bearing binding agreement by one part (drawer) against another (drawee) to pay a fixed amount of money for payment of goods and/or services as of a pre-determined date or on demand.

Question 3

Who are the three parties involved in a bill of exchange?

Answer 3

1 Drawee - the recipient of the bill who pays the amount set out at a given date
2 Drawer - the party that isues the bill and requires payment
3 Payee - the party paid the amount on the bill (usually bank)

Question 4

What are the advantages of a bill of exchange for short-term financing?

Answer 4

• drawer can obtain immediate funds
• convenient for transferring money from one place to another
• the bill is legal evidence of a transaction

Question 5

What are the disadvantages of a bill of exchange for short-term financing?

Answer 5

• the drawer bears the risk of the bill not being paid by the drawee (i.e. the bill is “dishonoured”)
• the drawee may incur penalties if the bill is unpaid.