How Do Bank Bills Work?

Bank Bills are a useful facility for obtaining larger amounts of finance sourced from the money market in a flexible manner. Bank Bills also generally underpin most other sources of finance. However, the operation of a Bank Bill is often misunderstood. A Bank Bill is a written agreement between the borrower and the financier, where the borrower agrees to repay a sum of money (face value) to the financier (bank) at a particular date in the future. The borrower sells the agreement to the financier and receives the discounted proceeds.

The date in the future when the face value needs to be repaid is termed the rollover. Rollover periods can be from 1 day to 180 days.

The discounted proceeds are the money that is actually received, which is effectively the face value less the interest component to the next rollover time. The face value of the Bill is the amount that is to be repaid at rollover.

When a Bill is rolled over, new discounted proceeds are provided and the process continues.

The price at which the financier will purchase the agreement from the borrower (discounted proceeds) is based on the formula:

               Face Value                . 1 + (Yield Rate x Term in Days) 100               365