A bill of exchange, also known as a draft, is a document that is written by the drawer to the drawee to pay money to a payee. The person who drafts the bill is called the drawer. The person that the bill of exchange is written for is called the drawee. And, the person to whom the bill of exchange is addressed to and to who is the person to receive payment is called the payee. It is, in essence, an order made by someone to another person to pay money to a third person.
Bills of exchange are used commonly in international trade. They are orders that are written by one person to his bank ordering the bank to pay the bearer the amount specified on a certain date. These were also commonly used before paper currency was readily available. They are, however, not used very often nowadays in place of paper currency.
The parties involved in a bill of exchange do not need to be three separate people. A person can draw on himself payable to his own order.
A bill of exchange may endorse in favor of another party, who may then turn around and endorse it to another party and so forth. The “holder in due course” is able to claim the amount of the bill against the drawee and all of its former endorsers. The bill is “negotiable” and that is what is meant by being able to do the above. There are some cases where a bill is marked “not negotiable”, however.
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