Discounting Bills of Exchange
- A bill of exchange is created by the seller as a means of payment when they offer goods or services to a buyer.
- The seller can then submit the bill of exchange for discounting to a financial institution (like a bank).
- The financial organization determines the bill’s present worth by discounting the future value, or the amount the buyer owes, according to the current interest rates and the remaining time until maturity.
- After taking ownership of the bill and paying the seller the bill’s discounted worth, the financial institution.
- The financial institution gets the entire amount due from the buyer when the bill matures.
Discuss the Meaning of Discounting Bills of Exchange
When a bank or other financial institution buys a bill of exchange from the holder before its maturity date at a reduced price, this financial activity is referred to as discounting bills of exchange.
A common financial transaction known as “discounting” enables the holder of a bill of exchange to receive immediate cash by selling the bill to a financial organization for a lower price.
Bills of Exchange