Bill of Exchange and Trade Drafts
Definition of a Bill of Exchange
A [Bill of Exchange] is a non-interest-bearing written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a predetermined future date.
Investopedia explains “[Bill of Exchange]”
How Bills of Exchange Work
Bills of exchange are similar to checks and promissory notes. They may be drawn by individuals or banks and are generally transferable by endorsement.
The key distinction between a promissory note and a bill of exchange is that a bill of exchange is transferable and can bind one party to pay a third party who was not involved in its creation.
Bank Drafts vs. Trade Drafts
If these bills are issued by a bank, they are commonly referred to as bank drafts.
If they are issued by individuals, they are commonly referred to as trade drafts.
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