Negotiable instruments

Differences between promissory note and

bill of exchange
Bill of Exchange Promissory note

A negotiable instrument issued to order A negotiable instrument issued by the

the debtor to pay the creditor a certain debtor with a written promise to pay the
sum of money within a specific date or on creditor a certain amount within a specific
demand. date or on demand.

A bill of exchange is an order to pay. A promissory note is a promise to pay.

Issued by creditor Issued by debtor

Drawee needs to accept the bill of No acceptance required from the drawee.
exchange before payment.
 Types of Bills of Exchange

• 1.Trade bill: Where the bill of exchange is drawn

and accepted to settle a trade transaction, it is
called Trade bill. This bill of exchange is drawn by
the seller of the goods and is accepted by the buyer.
• 2. Accommodation bill: Where a bill of exchange is
drawn and accepted for mutual help, it is called
Accommodation bill. This bill is for mutual benefit
without a trade transaction. It does not involve a
sale or purchase of any goods or services. This bill
carries an agreement between two parties for the
purpose of giving financial support to others.
• 3. Demand Bill of Exchange
• It is a bill that has no fixed date for the
payment. It is payable at the time when it is
presented by the holder. Days of grace are not
allowed on demand bill. Demand bill is also
known as sight bill.
• 4. Term Bill of Exchange
• It is a bill which is drawn for a specific time
period. This type of bill has either fixed future
date or determinable future time.
• 5.Inland Bill of Exchange
• It is a bill that is drawn, accepted and payable
in the same country. Actually, the drawer and
acceptor of this bill live in the same country.
• 6.Foreign Bill of Exchange
• A bill which is drawn in one country and
accepted and payable in another country is
called a foreign bill of exchange. Actually,
drawer and drawee of this bill are the
residents of two different countries.
 Benefits of discounting bill to banks
• Safety of Funds: The greatest security for a banker is that
a B/E is a negotiable instrument bearing signatures of two
parties considered good for the amount of bill; so he can
enforce his claim.
• Certainty of payment: A B/E is a self liquidating asset with
the banker knowing in advance the date of its maturity.
• Profitability: the discount on a bill is much higher than in
other loans and advances.
• Managing Liquidity Problems: The development of bills
discounting market would stabilize the violent
fluctuations in the call money market as banks could buy
and sell bills to manage their liquidity.
• State the type of bill in the following cases?
• Suppose Mr. X sells goods worth ₹ 75,000 to Mr.
Y. Mr. y is not in a position to pay the amount
immediately. So, Mr. X the seller draws a bill on
Mr. Y the buyer and Mr. Y accepts such a bill.
• If Mr. A is in need of money, he draws a bill on his
friend Mr. B who accepts it. Mr. A then discounts
this bill with bank i.e. bank will pay money before
the due date. Mr. A and Mr. B share the money
between them. On the due date, Mr. B pays to
the bank and Mr. A pays to Mr. B his share.
• 1. ________is an instrument in writing
containing an unconditional undertaking
signed by the maker to pay a certain sum of
money only to, or to the order of a certain
person, or to the bearer.
• 2. ________is an instrument in writing
containing an unconditional order, signed by
the maker, directing a certain person to pay a
certain sum of money only to, or to the order
of a certain person or to the bearer.
• 3. ________is a person entitled in his own
name to the possession of a promissory note,
bill of exchange or cheque and to receive or
recover the amount due thereon from the
parties.
• 4. A bill promise contains:
•  A promise
•  An unconditional order
•  A request
•  Endorsee
• 5. Accommodation bill is drawn:
•  Without trading
•  Without consideration
•  For financial assistance
•  All of the above