Discounting a bill of exchange means that the bill is bought for less than its face value by a financial institution or a bank.
A bill of exchange is a written order from one party to another to pay a certain amount of money on a specific date in the future. The holder of the bill may need cash before the due date, and they can get the money by discounting the bill of exchange at a bank or financial institution.
The bank or financial institution pays the holder the present value of the bill, which is calculated by deducting the discount or interest from the face value of the bill. The bank then collects the full amount from the party responsible for paying the bill on the due date.
Discounting a bill of exchange provides the holder with immediate cash, which can be used for various purposes such as paying bills, purchasing inventory, or financing other business needs. The bank earns a profit by charging a discount fee, which is the difference between the face value of the bill and the discounted value.
In summary, discounting a bill of exchange means that it is bought for less than its face value by a bank or financial institution, providing the holder with immediate cash and the bank with a profit.