Overall assignment:

Question No 01

What is bill of exchange?

Explain the advantage

Parties

Types

And format of bill of exchange

Question No 02

What are the capital market?

Types of capital market

Importance and main feature of capital market

Individual

Question NO 01

Explain the primary and secondary functions of commercial banks.

What is bill of exchange?

A bill of exchange is a written order used primarily in international trade that

binds one party to pay a fixed sum of money to another party on demand or
at a predetermined date. Bills of exchange are similar to checks
and promissory notes—they can be drawn by individuals or banks and are
generally transferable by endorsements.

Bill of Exchange: Definition

A bill of exchange is defined as follows:

An unconditional order in writing, addressed by one person to another,

signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time a
certain sum in money to (or to the order of) a specified person or to
bearer.

Bill of Exchange: Key Points

To better understand the above definition of bill of exchange, the following points
should be kept in mind:

Unconditional

Bearing no condition means that there is no condition attached to the bill.

Order

A bill of exchange is an order to pay certain money. It is not a request.

Giving Person

The person who makes (i.e., writes) the bill is the person who orders to pay the amount
of the bill. This individual is called the drawer.
Addressed Person

The person upon whom the bill is drawn or the person to whom the order is given is
known as the drawee. This individual accepts the bill by writing the word “Accepted”
across the face of the bill and signing it.

On-Demand

The bill is payable whenever the amount of the bill is demanded (only in the case of
sight bill).

Fixed Time

A clear and certain time in the future (e.g., 10 December 2019).

Determinable Future Time

A future time that can easily be determinable (e.g., 90 days after the date of drawing the
bill).

Certain Sum in Money

The amount is payable in the form of money rather than a commodity or any other
means. For example, a sum of $10,000 in money.

Payee

The payee is the person to whom the amount of the bill is paid.

The amount of the bill can be paid to the drawer, or to someone else, as per the order
of the drawer or to the person who presents the bill on the due date.

This is why definition contains the phrase” to or to the order of a specified person or to
bearer.”

Explanation
In this modern age of competition, credit selling is an evil that every businessperson has
to engage in. This is because credit sales are one of the strongest tools to enhance net
income.

The refusal to give credit means that competitors may win potential sales. However, no
businessperson wants to sell goods on credit to customers who may not pay their
debts.

Firstly, remember that businesspeople always seek to promote sales and, alongside this,
to secure money and customers. A seller wants to realize the amount of goods sold as
soon as possible, maximizing the goods sold and minimizing the chance of bad debts
can be minimized.

In contrast to a seller, a buyer wants to get maximum credit period. Is there any method
that satisfies both the parties? The answer is yes.

There is a payment method, known as bill of exchange, that provides the seller with
evidence of amount receivables as well as the amount of goods sold. Noteworthily, this
method also offers a sufficient credit period to the buyer.

The bill of exchange method of payment has several advantages compared to other
methods.

Specimen/Format of Bill of Exchange

Parties to a Bill of Exchange
There are three main parties involved in a bill of exchange: drawer, drawee, and payee.

Drawer

The drawer is the maker of the bill. They draw or writes the bill and they sign the bill.
Although a bill can be accepted before receiving the drawer’s signature, their signature
is required to complete the document.

Drawee

The drawee is the person upon whom a bill of exchange is drawn, or the drawee is the
person who accepts the bill and promises to pay the amount. When the drawee accepts
the bill, he becomes the acceptor.

Payee

The payee is the person who is named in the instrument as the individual who the
amount of the bill should be directed toward to be paid. As such, the payee is the
person who receives the amount of the bill.
The payee may be the drawer or someone else. If the drawer keeps the bill with
themselves until the due date and receives the amount of the bill, then the drawer and
payee are the same person.

There are also other parties involved in a bill of exchange, including:

 Holder
 Holder in due course
 Drawee in case of need
 Acceptor for honor

Holder of the Bill

The holder of a bill of exchange is the person who is entitled in their own name to the
possession of the instrument and to receive the amount due thereon.

It is not only possession but also entitlement to possession that makes a person the
holder of the bill. Thus, a person in possession of a stolen or lost bill cannot be a holder.

Holder in Due Course

Any person who, for consideration, becomes the possessor of a bill payable to the
bearer is known as the holder in due course. Amy person who has received the bill from
the previous holder is called a holder in due course.

Drawee in Case of Need

Sometimes, in bills of exchange, the name of a third person is mentioned. If the original
drawee does not accept or pay the bill, then this third person will accept and pay the
bill. This third person is known as the drawee in case of need.

Acceptor for Honor

If the original drawee refuses the bill and the holder of the bill gets the bill noted and
protested due to non-acceptance, then any person who is not already liable to accept
the bill may accept the bill with the consent of the holder. This person is known as the
acceptor for honor.
Types of Bill of Exchange
A bill of exchange can be classified based on the following three bases:

By Time Period

 Demand Bill of Exchange

 Term Bill of Exchange

By Objective

 Trade Bill of Exchange

 Accommodation Bill of Exchange

By Territory

 Inland Bill of Exchange

 Foreign Bill of Exchange

Demand Bill of Exchange

A bill with no fixed payment date. It is payable at the time when it is presented by the
holder. Days of grace are not allowed on a bill of this kind. A demand bill is also known
as a sight bill.

Term Bill of Exchange

A bill drawn for a specific time period. This type of bill has either a fixed future date or
determinable future time.

Trade Bill of Exchange

A bill drawn and accepted due to the sale and purchase of goods on credit. This type of
bill is drawn by the creditor (seller) and accepted by the debtor (buyer).

Accommodation Bill of Exchange

A bill drawn and accepted without the sale and purchase of goods. The main purpose of
this bill is to provide financial assistance to one or both parties. The bill does not come
into existence due to any trading activity.

Inland Bill of Exchange

A bill drawn, accepted, and payable in the same country. Both the drawer and acceptor
of this bill live in the same country.

Foreign Bill of Exchange

A bill drawn in one country and accepted and payable in another country. Both the
drawer and drawee of this bill live in two different countries.

Acceptance of Bill of Exchange

The drawee is not liable to pay the bill until they accept the bill. Therefore, the drawee’s
acceptance of the bill of exchange is necessary to complete the instrument.

The act of signing and writing the words “Accepted” across the face of the bill by the
drawee is called acceptance. The advantage of acceptance is that it fixes the liability on
the drawee.

Types of Acceptance

Acceptance is of the following two kinds:

 General acceptance
 Qualified acceptance

General Acceptance

If the bill of exchange is accepted without any condition to the order of the drawer, the
acceptance is termed as general acceptance.
Qualified Acceptance

When a bill of exchange is accepted with any qualification or condition to the order of
the drawer, the acceptance is known as qualified acceptance.

Qualified acceptance is separated into the following types:

 Qualification as to time
 Qualification as to place
 Qualification as to partial payment
 Qualification as to parties
 Qualification as to the condition

Tenor of the Bill of Exchange

The time period after which a bill of exchange is matured is called the “tenor” of the bill.

For example, if a 90-day bill is drawn and accepted, the bill will be matured after 90
days. So, the tenor of this bill is 90 days.

Days of Grace

In the business community, when the due date of a bill is calculated, it is customary that
after maturity of the bill, three extra days are given to the drawee for the payment of the
bill. These extra days are called days of grace.

Usance

Usance refers to the period of time for the payment of the bill which is fixed by the
tradition of the market.

For example, consider a 90-day bill that will be matured after 90 days. Therefore, tenor
of the bill is 90 days. However, three extra days will be given to the drawee for payment
of the bill. Here, the usance of the bill is 93 days.

Maturity of Bill of Exchange

A term bill matures when its tenor expires. Therefore, maturity of the term bill may be
defined as the end of the tenor of bill.

The date after the tenor ends is called the date of maturity, whereas the date at which
the term bill becomes payable by the drawee is called the due date of the term bill. A
bill becomes payable by the drawee after the days of grace.

For example, suppose a bill is drawn on 1 January 2019 for three months. Its date of
maturity and due date are shown as follows:

Working of Bill of Exchange

How does a bill of exchange work? Let’s explain this with the help of a few examples.

Example 1: Working Without a Bill of Exchange

The situation shown in the figure above can be understood using the following notes:

 Business activities stop because Mr. John the retailer has no money to
buy goods. For his shop, on the other hand, David & Co. the
manufacturer wants to sell goods for cash only.
 The problem can be solved if somehow goods are provided to the
retailer on credit and the manufacturer is also paid immediately for his
goods.
 A bill of exchange accepted by a reputed businessperson is also an
acceptable document for the bank. The bank will easily lend money to
the holder of the bill.

Now you will see how a bill of exchange helps to promote business activities.

Example 2: Working With a Bill of Exchange

The following points are noteworthy in relation to this figure:

 David & Co. the manufacturer sells goods on credit to Mr. John the
retailer. The retailer accepts a bill for the amount, and David & Co. gets
the bill discounted and fulfills its cash needs.
 Now, the retailer has goods to sell, and he will simply pay the amount of
the bill after three months.
 The bank discounts the bill and earns revenue in interest of $2,500.

This example shows how a bill of exchange helps to promote business activities.
Advantages of Bill of Exchange
The use of bills of exchange as a method of payment has several advantages compared
to other methods of payment for the credit sale of goods. Some of these advantages
are the following:

1. Legal evidence
A bill of exchange is a legal document; therefore, it is a legal evidence of the debt. As
such, the drawer can sue for the recovery of the amount of the bill.

2. Specific amount and date

A bill of exchange is signed by both parties. For this reason, both parties are aware of
the amount of the bill and its due date.

3. Discounting facility
Another advantage of a bill of exchange is that it can be discounted if the drawer or
holder needs funds before the due date. The bill can be sold to the bank to receive the
total amount in advance.

4. Negotiable
Negotiable means transferable. A bill of exchange payable to the bearer can be
transferred by one person to another for the settlement of debt.

5. Drawee enjoys full credit period

The drawee is bound to pay the amount of the bill on the due date. They cannot be
compelled to make the payment earlier. Therefore, the drawee enjoys the full credit
period.

6. Change in relationship
Before a bill of exchange, the seller is a creditor and the buyer is a debtor. The bill of
exchange converts this relationship into “drawer” and “drawee”.

7. Easy remittance
As bill of exchange is a negotiable instrument, just like a postdated cheque. Therefore, it
can easily be remitted from one place to another, just like a cheque.

Two Aspects of Bill of Exchange

Earlier, it was mentioned that creditors (sellers) can draw a bill of exchange and become
drawers. Since the amount of the bill is receivable by the drawer, the bill of exchange,
from this point of view, is called the bill receivable.

On the other hand, the debtor (buyer) accepts the same bill and becomes the drawee.
The amount of the bill is payable by drawee, and so from the drawee’s point of view, the
bill of exchange is known as the bill payable.

Do you want to test your knowledge about Bill of Exchange? Take the Multiple Choice
Questions we have prepared for you here.
WHAT IS A CAPITAL MARKET?
Capital market is a place where buyers and sellers indulge in trade (buying/selling) of financial securities like
bonds, stocks, etc. The trading is undertaken by participants such as individuals and institutions.

Capital market trades mostly in long-term securities. The magnitude of a nation’s capital markets is directly
interconnected to the size of its economy which means that ripples in one corner can cause major waves
somewhere else.

Types of Capital Market

Capital market consists of two types i.e. Primary and Secondary.

1. Primary Market

Primary market is the market for new shares or securities. A primary market is one in which a
company issues new securities in exchange for cash from an investor (buyer).It deals with trade of
new issues of stocks and other securities sold to the investors.

2. Secondary Market

Secondary market deals with the exchange of prevailing or previously-issued securities among
investors. Once new securities have been sold in the primary market, an efficient manner must exist
for their resale. Secondary markets give investors the means to resell/ trade existing securities.Another
important division in the capital market is made on the basis of the nature of security sold or bought,
i.e. stock market and bond market.
Characteristics of Capital Market
 Characteristics of Capital
Market

Long Term Investment

Capital market is a market for trading of long term securities. Long term
investment avenues are provided by it to the investors. Borrowers may raise
fund for a long period in the capital market. Here lending and borrowing is for
a period that is more than one year. Long term financial instruments such as
stocks, bonds, and debentures are traded in the capital market.

Link Between Borrowers And Lender

Capital market is a link between borrower and Lander. It links the person
having the surplus Fund with the one who has a shortage of fund. The capital
market provides different investment avenues in which the person can invest.
This help in providing borrowers with long term funds by bringing large
investments from peoples.

Capital Formation
Capital market’s actions determine the rate of capital formation in a market.
Capital market offers attractive opportunities to people who have surplus
funds so that they invest more and more in the capital market and are invited
to save more for profitable opportunities. This way it accelerates the rate of
capital formation in the economy.

Accurate Timely Information

Capital market provides accurate information to the investors. The information
must be provided timely. So that investor can make the decision of investment
Whether to invest in a company or not.

Includes Primary Market And Secondary Market

Capital market of two types of primary market and secondary market. The
primary market is concerned with the issue of new securities. Here securities
are issued for the first time. Secondary market is concerned with the existing
securities. Securities already traded is traded secondary market.

Government Regulations
The capital market works but under the advice of government policies. These
markets operate within the framework of regulations and government rules, for
example, the stock exchange works under the regulations of SEBI(Securities
Exchange Board of India) which is a government body.

Provides Liquidity
As the instruments may be convertible into cash in the capital market. As per
the need, of the investor can convert their investment into the liquid form. This
is how capital markets provide liquidity.

Variety Of Instruments
Capital market has a variety of instrument. Some instruments are at high risk
and some instruments are low risk. this instrument can be debentures, Equity
shares preferential Shares. As per the risk-taking ability of an investor can
choose Between in these instruments.
Explain the primary and secondary functions of commercial
banks.
Seconday function
3) Functions of Commercial Bank

Functions of Commercial Bank can be categorized into Primary Functions, Secondary Function and Modern
Functions.

i) Primary Functions of Commercial Bank

Primary functions of the commercial bank consist of accepting deposits(receive deposits), lending
money (making Loans and Advances) and investment of funds.

A) Accepting Deposits-

The primary function of commercial banks is to accept deposits from the public. Banks maintain deposit
account for their customers and convert deposit money into cash and vice versa, at the discretion of the
latter. Banks accept money from the public by receiving deposits by way of different accounts.

(1) Saving Bank Account

 Savings bank account is useful for the person who deposits money by small savings. The
customer is at liberty to deposit money in this account at a number of times on the same day. In case of
savings deposit, there are certain restrictions on the number of withdrawals or on the amount that can be
withdrawn per week. Generally, the Bank account holder can withdraw money twice a week from such
account. A minimum balance of Rs 100 should be maintained and if cheque book facility is allowed, the
minimum balance should be Rs 1000 on this saving deposit. The rate of interest in such account is
comparatively lower than the other accounts.

(2) Current Account

A current account is running account which is continuously in Operation. In this account

money or funds can be deposited many times on the same day. Similarly, withdrawal can be made by the
account holder many times on the same day. Usually, a bank does not allow any interest on this kind of
deposit, because Bank cannot utilize this short-term deposits. This type of deposit accounts is generally
opened by Business people for their convenience

(3) Recurring Deposit Account

Recurring deposits is one form of saving deposit, in this type of deposit, at the end of every
week or month, a fixed Amount deposited regularly. the amount can be withdrawn only after specified
period. this deposit works on the Maxim " little drops of water make a big ocean".The rate of interest on
such account stands favorably as compared to the rate of interest on the savings bank account because
such account partly resembles the fixed deposit account.

(4) Fixed or Time Deposit Account

Fixed or time deposit account, the money is deposited for a fixed period and cannot be
withdrawn before the expiry of that specified period. The rate of interest on such deposit depends upon the
length of time of deposit. This account is also called the time deposit because the money is repayable on the
expiry of the fixed period of time only. The terms and condition of such accounts are regulated by Reserve
Bank of India.

B) Lending Money -

Lending money is one of the important functions of a bank. This is the lending or advancing of money
either upon or without security. Bank accepts deposits from those persons who have surplus money and
grant loan and advance to those who need. Charge comparatively higher rate of interest on the amount
advanced as a loan. These loans are advanced by the bank in the following ways.

(1) Loans:

In this facility, certain amount in the form of an advice is given for a certain period. This
sanctioned amount of Advanced is deposited the bank in the current account of the person concerned. The
interest is charged on the whole amount of the loan. It is irrelevant whether the whole amount was
withdrawn by the debtor or not. The loan may be refunded as a whole in one time or installments. The
property is to be Pledged or mortgaged for such Loan.

(2) Cash Credit:

The Businessman generally need regular loans, and therefore it may be inconvenient for them to
make fresh agreement every time. Thus, they make an agreement in this regard for an anticipated certain
amount required in the year. Such amount is not withdrawn as a whole in one time but the customer
withdrawals only such amount whichever is required at a time. The interest is charged only on the amount
withdrawn. The cash credit is generally allowed on the securities only

(3) Overdraft:
 Overdraft is an arrangement between a banker and his customer by which the
customer is allowed to withdraw over and above the credit balance in the current account up

to an agreed limit. The interest is charged only for the amount sanctioned. This is a temporary

financial assistance. It is given either on personal security or on the security of assets.The main difference
between the overdraft and cash credit is that the facility of overdraft may be available to the current
account holder only while such cash credit may be given to any person.

(4) Discounting of Bills:

Bank grants advance to their customers by discounting bills of

exchange or pronote ( Promissory Note). When the bank gives advance on the bills before the date of
maturity, then the interest till the date of maturity from the date of sanctioning the advance is deducted.
This deduction is called discounting.

C) Investments of Funds -

While making an investment a bank is required to observe three principles, namely liquidity,
profitability and safety. A bank invests its funds in government securities issued by central government as
well as state government. It also invests in other approved securities like the units of UTI, shares of GIC and
LIC, securities of State Electricity Board etc.

ii) Secondary Functions of Commercial Bank

a) Agency Functions

See in detail......Agency Functions of Commercial Bank

b) General utility Services -

(1) It issues letter of credit, Traveller's cheques, gift cheques.

(2) It provides Tax Consultancy services. It gives advice on income tax and other Personal taxes

(3) It facilities easy and quick transfer of fund from one place to another, place by means of cheques,
drafts MT, TT etc.

(4) It deals with foreign exchange transactions thereby helping the importers and exporters

(5) Bank makes arrangements for transport, insurance and warehousing of goods

(6) It provides consultancy services on technical, financial, managerial and economic aspects for the
benefit of micro and small enterpriserise

iii) Modern Functions of Commercial Bank

(1) It issues Credit Cards, Debit Cards, Smart Cards etc.

(2) Changing Cash for Bank deposit and Bank deposits for cash
 (3) Providing 24 hours facility of payment through ATM's

(4) Transferring Bank Deposit between individual or companies

(5) Exchanging deposits for bills of exchange government Bond, secure and unsecured promises of
trade and industrial units

(6) Underwriting capital issues