A bill of exchange, also called draft, is defined as an unconditional order in writing, addressed by one person (the drawer) to another (the drawee) and signed by the person giving it, requiring the person to whom it is addressed to pay on presentation, or at a fixed or determinable future time, a specified sum of money, to the order of a specified person (the payee) or to bearer.
There are different types of drafts. A bank draft is one drawn by a bank on another bank. A demand bank is one payable on demand. An example of it is the sight draft, payable on presentation with three days of grace. A time draft is one which matures or falls due after a number of days or months after date or after sight. A documentary draft is one accompanied by documents, using shipping
documents, providing that the goods have been dispatched. To illustrate the use of such a draft let us take an example.
A seller in London has sold goods on credit to a buyer in New York. The contract provides for payment by documentary drafts drawn on the buyer payable at sixty days after sight to a bank. The seller, in our case the drawer, draws a draft on the buyer at sixty days after sight, and sends it to the bank indicated as payee, accompanied by the required shipping documents. The bank will ask the buyer to accept the draft this means the drawee writes the word 'accepted' across the face of the draft and signs it. The draft becomes an acceptance. By accepting the draft the drawee has promised to honour it at maturity. Should he fail to keep his promise that would mean he has dishonoured the draft.
The draft is a negotiable instrument that means the holder may pass it to someone else by signing it on its back, an operation called endorsement. The endorsee becomes the holder of the draft. Should the holder like to get the money of the bill of exchange before the maturity date, he can get the draft discounted. This means he can sell it to a bank or a discount house, which pays him the amount of the bill less the discount rate, the deducted amount being the interest for payment before maturity.
The bill of exchange by Cristina Nuta for FamousWhy.com
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