Question1 Which one of the following statements is incorrect? Bills are always sold at a discount to its face value A bank can provide both a bill acceptance facility and a bill discount facility An issuer will seek to sell the bill in the market at the highest yield If a commercial bank accepts the bill this enhances the credit quality of the debt arrangement The bank increases the creditworthiness of the bill by acting as the acceptor ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

Let's break down the statements about bills and their trading/credit implications one by one to assess which is incorrect.
Option 1: 'Bills are always sold at a discount to its face value' This statement asserts that bills (typically commercial paper or Treasury bills) are always issued at a discount. In practice, bills are issued at a discount to par and mature at par, so this is generally true as a defining feature of discount instruments. However, there can be nuances (some instruments may be issued at par with a yield stated), but for standard money market bills, discount is the norm, making this statement largely consistent with typical practice.
Option 2: 'A bank can provide both a bill acceptance facility and a bill discount facility' Banks commonly offer a bill acceptance facility (accepting a customer’s bill of exchange) and a bill discount facility (discounting bills in market). Providing both services is a standard banking practice, so this statement is true.
Option 3: 'An issuer will seek to sell the bill in the market at the highest yield' This is the statement identified as incorrect. In capital markets, an issuer would typically seek to sell at the lowest acceptable yield or price near par to minimize interest costs and funding costs. Maximizing yield would imply higher borrowing costs for the issuer, which is contrary to the issuer’s objective of funding efficiently. Therefore, this statement is incorrect.
Option 4: 'If a commercial bank accepts the bill this enhances the credit quality of the debt arrangement' When a bank accepts a bill of exchange, the bank’s acceptance provides credit support, improving the perceived credit quality and reducing default risk in the eyes of investors. This statement is true.
Option 5: 'The bank increases the creditworthiness of the bill by acting as the acceptor' This is essentially a restatement of Option 4 from a different angle: the bank's acceptance increases creditworthiness. This is true.
In summary, most statements align with standard bill practice (discount issuance, dual facilities, bank acceptance enhancing credit). The critical incorrect assertion is that an issuer would seek the highest yield, which contradicts typical funding objectives. The reasoning shows why the incorrect option is incorrect and why the others align with standard banking and money market behavior.

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