What is bill of exchange and how to profit with debt instruments

What is a bill of exchange and how to make money with it

11-06-2020

The bill of exchange is one of the financial instruments you can earn with. Interestingly, it dates back to the Renaissance era and used to be a way of obtaining a loan.

Later, the Geneva Convention of 1930 had been adopted, stipulating the process of the bill of exchange circulation. So, it is fair to say that these instruments are governed by international law. This article is going to answer two burning questions, “What is a bill of exchange?” and “How to make money with it?”

Contents:

1. Bill of exchange is a debt instrument
2. Features of the bills of exchange: What to know
3. Bank bills and how to profit from them

Bill of exchange is a debt instrument

The bill of exchange is essentially similar to a promissory note. This is documentary evidence that one party has a debt to the other. The party that wishes to borrow funds is called the bill issuer. The other party that can be either a natural person or a legal entity lends money and is called the bill holder.

The Convention adopted in Geneva in 1930 distinguishes between promissory notes and bills of exchanges. The promissory note is a financial instrument in which the debtor agrees to return the money directly to the holder of the promissory note within the pre-agreed time period stipulated in the document. As far as the bill of exchange goes, the money shall be returned not to the bill holder but to the third party indicated in the document.

Bill of exchange explained in layman’s terms

Features of the bills of exchange: What to know

When analyzing the term “bill of exchange”, we have established that it is one of the types of financial instruments. That being said, unlike shares and bonds, it is not kept in the depository and typically has no electronic version. So, to have your funds returned back to you, you must keep the bill of exchange safe.

PLEASE NOTE:

Details to be entered in the financial instrument are approved legislatively. It must be filled out accurately for the document to be considered valid.

The promissory note is a financial instrument in which the debt is returned to the holder. The document itself prescribes the commitment to pay a specific amount of money within a specific time period without indicating the terms and conditions of its fulfillment.

There is also a number of additional information that must be specified in the promissory note. This includes the place where the payment is made, the name of the party the amount of money is paid to, the date issued, and signature of the issuer.

When filling out the bill of exchange, the name of the payer and the recipient of the money must also be indicated.

Bank bills and how to profit from them

A bank promissory note is a financial instrument stating that the institution borrows the client's money for a certain time period. Typically, this way of investing in banking products is compared to deposits. That being said, there are differences you should be aware of in order to protect your money and reap benefits.

One of the advantages of buying the bank bill is a higher income as compared to a deposit. However, as you may already know, the higher the return on investment, the riskier it is. This is also true when it comes to the bills of exchange.

Below are some of the features bank bills have. You need to know about them before investing.

  • Profit earned on the bill of exchange is the difference between its buying price and the amount to be paid under it. E.g. An investor buys the bills of exchange in the amount of 1,000 conventional units (i.e. that is the amount the bank undertakes to pay the investor), and pays 800 conventional units for the financial instrument itself. The profit makes 200 conditional units. The profit is sometimes indicated in percentage terms on the bill itself.
  • Unlike bank deposits, bills of exchange cannot be insured. If the bank goes bankrupt or loses its license, the law stipulates that the money on this financial instrument is paid after the property belonging to it has been sold. However, there are oftentimes no funds left to make relevant payments to the bill holders. As far as the deposits go, a certain amount is paid by the deposit insurance fund.
  • The bill of exchange is a document that has a maturity date. You cannot return the money earlier than the said date. When it comes to deposits, an early repayment option is often available but it involves the loss of interest on it.
  • Income received on bills of exchange is subject to taxation which is rarely the case in deposits. This is another downside of it. If you are drawn to this debt instrument chiefly because of a higher income than a deposit, make sure to factor in the charged tax. It is likely that the net benefit on the bill might be slightly higher than on the bank deposit.
  • Keep in mind that paper bills need to be kept safe and provided for repayment. Also, make sure that this document is accurately filled out in compliance with all legal regulations.

So, is it possible to make money with bank bills and should you pick this financial instrument for investment? It all depends on the investing goals. What you need to do first is weigh up all the pros and cons and decide whether this risk-to-reward ratio works for you.



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