In their simplest definition, Bank Bills are a form of an IOU (similar to a cheque, which in itself is a bill of exchange) with the exception that Bank Bills have a specific date in the future when they are payable (i.e. Maturity date). Apart from having a specific maturity date, their make up is very similar to that of a cheque.
The Bank Bills that we sell are Bank Accepted Bills. These are Bank Bills that have been "accepted" (guaranteed) by an Australian bank. In accepting the Bank Bill, that bank undertakes to make payment at maturity.
We offer competitive rates of interest based on market rates. The actual rate of interest will depend on the term and the amount you have to invest. Interest is paid at maturity and represents the difference between the Face Value and the purchase price of the bill.
When you invest in a Bank Accepted Bill, you purchase the face (maturing) value at a discount. The full face value of the Bill is paid to you at maturity. The difference between the purchase price and the face value represents the interest earned and it this amount that should be declared for taxation purposes. The discount formula to convert from the face value of the Bill to the purchase price is complicated. The easiest way to explain is as follows:
Interest = Purchase Price x Interest Rate x Days to Maturity 100 x 365
Face Value = Purchase Price + Interest
It is easy to see that this is identical to working out simple interest on any deposit. The hard part is calculating it backwards from the face value to the purchase price. Bank of Melbourne will look after this aspect for you.
You are asked to take care when deciding the term of your investment. The interest rates prevailing at the time of request to redeem, and the term remaining to maturity, will determine the repurchase price of the Bank Bill. This rate may be different to the rate that the Bank Bill was originally purchased at, as the rates may have moved in the intervening period.
Bank of Melbourne will hold the Bank Bill on a safe custody basis pending maturity or repurchase, and provide a letter confirming your purchase. This ensures that the Bank Bill does not get mislaid and that it is dealt with on the maturity date. Should you desire to take delivery of the Bank Bill and subsequently lose it, you have nothing to "cash in" or present at maturity. Holding the Bank Bill in safe custody ensures that this will not happen.