Question

Write a short note discounting of bills of exchange.

What is discounting of a bill of exchange?

Briefly explain the following source of finance.

Discounting of bills of exchange

Answer 1

The term “discount of a bill” refers to the bank’s payment of a bill of exchange at a reduced rate. When the holder of a bill of exchange needs money before the bill’s maturity date, he or she can present the bill to his or her bank, which will make the payment after deducting a discount. After the maturity time, the bank may receive payment for the drawee.

Answer 2

• This implies procuring cash from a bank in exchange for credit instruments. Commercial banks provide short-term finance to business concerns by discounting their bills of exchange, promissory notes, and hundies.
• Banks charge some commission for this service by paying a price lower than the face value of the credit instrument. The instrument holder remains liable to the bank if the instrument is dishonoured on maturity.