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Difficulty: MediumBanking: Functions and Services to Trade

A wholesale merchant in Kano sells goods worth ₦2,000,000 on credit to a buyer and receives an accepted 90-day trade bill. Needing immediate cash to restock inventory before the maturity date, the merchant presents the accepted document to his commercial bank to receive immediate cash at a sum less than its face value. Which banking service to trade is the merchant utilizing?

  1. Discounting a bill of exchangeAnswer
  2. B
    Establishing a letter of credit
  3. C
    Securing a bank overdraft
  4. D
    Setting up a standing order

Answer

Discounting a bill of exchange
Discounting a bill of exchange is the banking service where a commercial bank advances cash to a customer on an accepted bill of exchange before its payment due date, deducting a small fee known as discount. This provides the merchant with immediate working capital without waiting for the credit period to elapse.

Step-by-Step Solution

1
Analyze the financial transaction described in the scenario.
The merchant holds a 90-day accepted bill of exchange for ₦2,000,000 and needs immediate working capital before the maturity date.
Identifying the financial instrument (trade bill) and the merchant's financial need (immediate cash before maturity) defines the relevant commercial banking service.
2
Evaluate the commercial bank service that converts unexpired trade bills into cash.
The commercial bank purchases the accepted bill from the holder at less than its face value (deducting interest/discount charges) and collects the full amount from the debtor at maturity.
This specific process is known as discounting a bill of exchange.

Key Concept

Discounting Bills of Exchange
Estimated Time:1m 0s
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Topics

Banking: Functions and Services to Trade

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