Instruments of Exchange

Question 1

What is Legal Tender?

Answer 1

Legal tender refers to the forms of money that are used in payment for goods and services within a country. The country by law, adopts those forms of money.

Question 2

Explain representative money

Answer 2

If money is to be sent some distance, either locally or overseas, it is better to use some
representation of money. For example, locally, within a currency area a cheque may be used.

Question 3

What is a cheque?

Answer 3

A cheque is an order made by the drawer (person writing the cheque) to his/her banker instructing that a sum of money, indicated on the cheque, be paid to the person or organization
named on the cheque.

Question 4

State the three parties to a cheque

Answer 4

The drawer/ payer – the person who writes the cheque

● Drawee (bank) – the party asked to make the payment

● Payee – the person to whom the money is to be paid

Question 5

What key details appear on a Bill of Exchange?

Answer 5

 The amount of money
 The date
 The parties involved (including drawer and drawee)

Question 6

What are the differences between a Bill of Exchange and a Cheque?

Answer 6

A bill of exchange fosters international trade

A bill of exchange is an unconditional order in writing, addressed by one person to another signed by the person giving it.

A bill of exchange is a negotiable instrument – it can be endorsed and used to transact business with several persons.

There are several different types of cheques eg open cheque, crossed cheque, manager’s cheque

Many businesses will not accept personal cheques

Cheques are not normally used for international payments (Mark Wilson, p.169)

Question 7

What are the similarities between a Bill of Exchange and a Cheque?

Answer 7

Both are used to settle debts, pay bills

 There are three (3) parties: The drawer/ payer
 Drawee (bank) – the party asked to make the payment
 Payee – the person to whom the money is to be paid

Question 8

What information appears on a credit card?

Answer 8

 Its number
 The card-holders’s name
 When it expires
 The security code

Question 9

How might a seller want payment for an expensive item?

Answer 9

Bank drafts may be used to buy ‘big ticket’ items such as household appliances or cars. Credit cards cannot be used if the cost exceeds the card limit but a bank draft can be for any amount.

Question 10

Explain Direct debit

Answer 10

This is similar to a standing order however amounts withdrawn at regular intervals are usually different. A direct debit instruction allows the payees bank to withdraw regular payments, but usually different amounts. This method can be used to pay for example an electricity bill.

Question 11

Identify forms of payments used in international trade

Answer 11

Telegraphic money orders

Banker’s draft (or manager’s cheque/ bank draft)

Letter of credit (the technical term for letter of credit is documentary credit)

Documentary bill

Promissory Note

Postal order

Money order (or bank order/bank money order)

Question 12

What is the Telegraphic money order?

Answer 12

The telegraphic money order is a quick way of making payments or transferring sums of money
to persons in local or overseas locations. For example if a Caribbean author is to be paid by an overseas publisher the publisher can make payment by means of a telegraphic money order.

Question 13

What is the Banker’s Draft?

Answer 13

A bank draft can be used when payments for goods and services are to be made in a foreign
currency. The customer can ask for the draft to be made out for example, in US dollars, euros or
pounds.