What is Bill of Exchange
A bill of exchange is an order made by the shipper or an exporter who is called a drawer of bill to the buyer or importer who is called a drawee of the bill, asking him to make the payment of the amount specified in the Bill of exchange against the value received by way of submission of shipping documents and giving a detailed account for the drawee in the form of commercial invoice.
In the international trade, there are very few instances of drawing a clean bill of exchange as the payment is usually made against shipping documents evidencing the actual shipment made. The exporter draws a dr5aft which may be either at sight or usance. The bills are drawn in to two sets if the goods are shipped by sea. These sets are presented to the buyer by an authorized dealer through its foreign correspondent. When any of the drafts is paid it is a sight draft and accepted by the buyer when it is a usance draft.
The bill of exchange are either negotiated/purchased or sent through collection. If there is a purchased /negotiated and the credit can immediately given to the exporter and if there is no such facility available the amount stated therein will be made available to the drawer only on receipt of the proceeds of said Bill of Exchange.
Bill of exchange is a negotiable instrument as per Section 5 of Negotiable Instrument Act,1881 and simillar Acts are also inforce in various other countries. The rights and responsibilities of the drawer, the drawee and the endorsers are as per the negotiable Instruments Acts. Though the banker is acting as an agent for collections or a holder in due course, the principal responsibility of the payment to be received is that of the drawer of the bill and incase bill of of exchange remaining unpaid or payment refused, the banker holds no responsibility except may be charged and proved with gross negligence in handling the documents.
In order to protect the interest of the banks and the financial institutions negotiating the bill of exchange under the letter of credit, Uniform Customs and Practice for Documentary Credits has laid down that though the Bill of Exchange are drawn without recource to the drawer of the bill under letter of credit, in case of bil of Exchange remaining unpaid the negotiating banker has a right to recall the funds disbursed at the time of negotiation. If the bill is dishonoured it should be got noted and protested from a Notary Public who will give his observations on the date dishonour and will charges his fee for this job.
1. What is a Bill of Exchange?
A. A written order to pay money
B. A written promise to pay money
C. An oral agreement between two parties
D. A receipt of payment
✅ Answer: A
Explanation:
A Bill of Exchange is a written, unconditional order directing one person to pay a certain sum of money to another either on demand or at a fixed time.
2. Who is the drawer in a Bill of Exchange?
A. The person who accepts the bill
B. The person who orders payment
C. The person to whom payment is made
D. The bank
✅ Answer: B
Explanation:
The drawer is the person who creates or draws the bill and orders the drawee to make payment.
3. Who is the drawee in a Bill of Exchange?
A. The person who draws the bill
B. The person who pays the amount
C. The person who endorses the bill
D. The bank issuing the bill
✅ Answer: B
Explanation:
The drawee is the person upon whom the bill is drawn and who is directed to pay the amount mentioned.
4. Who is the payee in a Bill of Exchange?
A. The person who draws the bill
B. The person who accepts the bill
C. The person to whom payment is to be made
D. The person who discounts the bill
✅ Answer: C
Explanation:
The payee is the person in whose favor the payment is to be made.
5. A Bill of Exchange must be:
A. Oral
B. In writing
C. Conditional
D. None of these
✅ Answer: B
Explanation:
According to the Negotiable Instruments Act, a Bill of Exchange must be in writing and signed by the drawer.
6. Which of the following is NOT a feature of a Bill of Exchange?
A. It must be unconditional
B. It must be in writing
C. It can be verbal
D. It must be signed by the drawer
✅ Answer: C
Explanation:
A Bill of Exchange cannot be verbal; it must always be in written form.
7. A Bill of Exchange is governed by:
A. The Companies Act, 2013
B. The Negotiable Instruments Act, 1881
C. The Contract Act, 1872
D. The Banking Regulation Act, 1949
✅ Answer: B
Explanation:
Bills of Exchange are governed by the Negotiable Instruments Act, 1881 in India.
8. When the drawee signs the Bill of Exchange, he becomes the:
A. Drawer
B. Payee
C. Acceptor
D. Endorser
✅ Answer: C
Explanation:
The drawee becomes the acceptor once he signs the bill, agreeing to pay the amount.
9. What happens when a Bill of Exchange is dishonoured?
A. The bill is paid on time
B. The drawee accepts the bill
C. The drawee refuses to pay or accept
D. The bill is renewed
✅ Answer: C
Explanation:
A bill is said to be dishonoured when the drawee refuses to accept or pay the bill when it becomes due.
10. What is a “Trade Bill”?
A. A bill issued by a bank
B. A bill drawn and accepted for a genuine trade transaction
C. A bill issued for personal loans
D. A bill not negotiable
✅ Answer: B
Explanation:
A Trade Bill arises out of a genuine trade transaction between buyer and seller.
11. What is a “Accommodation Bill”?
A. Drawn to help each other financially
B. Drawn for trade purposes only
C. Drawn by a bank
D. Drawn without acceptance
✅ Answer: A
Explanation:
An Accommodation Bill is drawn without any trade transaction, to provide financial assistance to each other.
12. What is meant by “Maturity of a Bill”?
A. The date it is drawn
B. The date it is accepted
C. The date on which payment is due
D. The date it is dishonoured
✅ Answer: C
Explanation:
The maturity date is the date when the bill becomes due for payment.
13. How many days of grace are allowed on a Bill of Exchange?
A. 5 days
B. 3 days
C. 7 days
D. No days
✅ Answer: B
Explanation:
3 days of grace are added to the due date of a bill for calculating the maturity date.
14. What is “Discounting of Bill”?
A. Paying bill after due date
B. Selling bill to bank before maturity
C. Canceling the bill
D. Refusing to pay the bill
✅ Answer: B
Explanation:
Discounting a bill means selling it to a bank before maturity at a discount for immediate cash.
15. Who discounts the Bill of Exchange?
A. Payee
B. Drawee
C. Bank
D. Drawer
✅ Answer: C
Explanation:
Bills are usually discounted by banks, which provide cash before the bill’s maturity.
16. Which of the following is NOT a party to a Bill of Exchange?
A. Drawer
B. Drawee
C. Debtor
D. Payee
✅ Answer: C
Explanation:
While the drawee is often a debtor, the term ‘debtor’ is not a formal party in a Bill of Exchange.
17. What does “Endorsement” of a bill mean?
A. Signing on the back to transfer ownership
B. Cancelling the bill
C. Refusing the bill
D. Destroying the bill
✅ Answer: A
Explanation:
Endorsement means signing on the back of a bill to transfer rights to another person.
18. When a bill is sent to the bank for collection, it is known as:
A. Bill discounted
B. Bill sent for collection
C. Bill dishonoured
D. Bill renewed
✅ Answer: B
Explanation:
If a holder sends the bill to a bank to collect payment on his behalf, it is called bill sent for collection.
19. What is “Renewal of Bill”?
A. Refusing the bill
B. Drawing a new bill in place of the old one with mutual consent
C. Cancelling the bill
D. Paying the bill before maturity
✅ Answer: B
Explanation:
Renewal of Bill occurs when both parties agree to cancel the old bill and draw a new one for an extended period.
20. A Bill of Exchange is a type of:
A. Non-negotiable instrument
B. Negotiable instrument
C. Verbal agreement
D. Loan document
✅ Answer: B
Explanation:
A Bill of Exchange is a negotiable instrument, meaning it can be transferred from one person to another for value.