Bill of Exchange – Definition

Cite this article as:"Bill of Exchange – Definition," in The Business Professor, updated January 17, 2020, last accessed December 4, 2020,


Bill of Exchange Definition

A bill of exchange refers to a financial instrument explicitly used for international trade to bind one party to pay a specified amount of money to the holder of the document or designated person. The bill of exchange is paid after a specified term or on-demand. Other financial instruments similar to a bill of exchange are promissory notes and checks that can be drawn by banks or individuals and are also transferable through endorsements.

A Little More on What is a Bill of Exchange

Bills of exchange are usually negotiable instruments containing a payment order of a specific amount of money to a particular person or entity within a specified date. The document is used when there is a business transaction that involves credit purchases. In this case, the creditor (seller) will issue the debtor (buyer) with a bill of exchange because of the money it owes for the goods or services delivered.

Note that for a bill of exchange to be valid, the debtor has to accept it first. If the debtor refuses to receive it, it means that it has no value. The moment a debtor receives the bill, the debtor pays off the specified amount to the creditor. In case the debtor fails to honor the payment within the time mentioned in the document, the bill is dishonored.

Parties Involved in a Bill of Exchange

Though there are several parties involved in a bill of exchange, the most common and main entities are as follows:

  • Drawer: This is the party that makes the bill ordering the payment of a specified amount of money. This party is the drawer of the instrument and obliges the drawee to make payments to the payee.
  • Drawee: This is an entity that receives the bill of exchange directing him to make payment of the specified amount of money.
  • Payee: This party is the one that receives a payment made by the drawee as specified in the bill of exchange.

Bill of Exchange Types

There are two types of bills of exchange that banks issue, also known as bank drafts. The documents can be referred to as trade drafts if individuals issue them. The two types of bill exchange are as follows:

  • Sight bill: This is a type of bill of exchange where payment is immediate payment or on-demand.
  • Term bill: With this type of bill of exchange payment is for a later date (payment is made at a specified time in the future).

Bill of Exchange Features

During a business transaction where be buyer purchases the goods on credit, the seller prepares the bill typically and sends it to the purchaser of goods for acceptance. The d usually contains specific details such as:

  • Name and the address of the buyer and seller
  • The billing amount
  • Bill maturity date
  • Signatures and stamps of both parties (seller and buyer)

However, note that the bill of exchange issuers have their formats. So, there is likely to be some variation in the information stated above, including the layout of the document.

Also, a bill of exchange is transferable, meaning that the drawee may at some point find itself making payment to a different party from the original one. As stated earlier, the payee can legally transfer the bill to another entity through what we call an endorsement, generally done at the back of the document.

Reference for “Bill of Exchange” › Investing › International / Global › Risk Management Basics › Fixed Income Basics

Academics research on “Bill of Exchange”

The bill of exchange and private banks in Lancashire, 1790-1830, Ashton, T. S. (1945). The bill of exchange and private banks in Lancashire, 1790-1830. The economic history review15(1/2), 25-35.

Rights of Holder of Bill of Exchange against the Drawee, Aigler, R. W. (1924). Rights of Holder of Bill of Exchange against the Drawee. Harv. L. Rev.38, 857.

Gold, silver, and the Glorious Revolution: arbitrage between bills of exchange and bullion, Quinn, S. (1996). Gold, silver, and the Glorious Revolution: arbitrage between bills of exchange and bullion. Economic History Review, 473-490. Arbitrage between bullion and bills of exchange transmitted exchange rate shocks to early modern England’s monetary stock. The country’s entry into the Nine Years War following the Glorious Revolution of 1688 weakened the pound’s exchange rate which ended a period of gold imports into England and began a period of silver exports. The success of this international arbitrage was built on innovative intermediaries such as the London goldsmith-banker Stephen Evance. This article shows how he channelled international bullion flows and arranged for complementary financial services that facilitated arbitrage between bills of exchange and bullion.

International Unification of Laws Concerning Bills of Exchange, The, Hudson, M. O., & Feller, A. H. (1930). International Unification of Laws Concerning Bills of Exchange, The. Harv. L. Rev.44, 333.

Doctrine of Price v Neal, Ames, J. B. (1890). Doctrine of Price v Neal. Harv. L. Rev.4, 297.

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