1. What is it?
A Bill of Exchange (BOE) is a negotiable instrument commonly used by financing companies (credit or investment funds) in order to raise capital in the market and lending to their clients. BOEs have the same characteristics of a CD, but the issuer is a financing company rather than a bank. The main difference is that the BOE is necessarily tied to actual trading activities – selling or buying goods, basically. In other words, they are strictly related to a commercial transaction.
As financing groups usually have a smaller size compared to banks, such notes are riskier, hence their higher interest rates, paying better than CDs or even treasury bonds sometimes. BOEs are daily updated and can be redeemed almost anytime. Minimal values for investments change a bit, but can reach as low as BRL100.00 depending on the financing company involved, which makes it acessible to a smaller investor.
BOEs were more popular in the past. In the 80s, some financing groups went bankrupt, leaving over 35,000 investors broken and debts of BRL250m or more in the market. Although it is a past issue, BOEs were dead and gone for quite a long and, even though they are reappearing in the market lately, they are not a widespread option. Nonetheless, they can be considered a safe investment nowadays, as they are backed by the local guaranty fund (FGC), at least for operations smaller than BRL250,000.
Rates can be pre, post fixed or floating, and can also be tied to more than one paying basis. In general, BOEs are tied to the same interest rates of a CDI. Financing groups use to pay 100% of CDI rates or even more, depending on the amount and the period of investment.
If you redeem the BOE before 30 days, if possible of course, you must levy the IOF tax, using the decrescent table, which can negatively affect your profits. Also, income taxes may be drilling your profits.
The riskier factor related to BOEs is the credibility and reliability of the issuers – if the financing group goes bankrupt, you can never receive your investment back. However, it is currently backed by FGC to the limit of BRL250,000.00. In order to mitigate risks, researching the references and history of the financing company is truly advised.
Another possible risk is the chance of BOE interests prove to be lower than the inflation in the period of the investment.
There are two tax and charges incident on BOEs:
1. Income tax – decrescent depending on the period of investment and the expiration dates:
- Expiration date within 180 days or less: 22,5% (just over profits)
- Expiration date within 181 to 360 days: 20% (just over profits)
- Expiration date within 361 to 720 days: 17,5% (just over profits)
- Expiration date within 720 days: 15% (just over profits)
2. IOF tax, but only if the redemption happens BEFORE 30 days of investment. There is a table that shows IOF rates, according to a redemption happening during the first 30 days of investment:
|Days passed from the investment date||Taxable stake of profits (%)|
You don’t need to be concerned about paying taxes, as the financing group itself needs to pay them. In the redemption date, the income tax is automatically deducted from profits obtained.
Another possible charge comprises fees and services from the financing company. Usually they don’t charge anything for this kind of investment though. So be aware about whether you are being charged or not, and if you are, maybe it is better to look for other institutions.
5. How it works
BOEs are traded with financing groups. To be investing, the only you need is finding a trustworthy institution, and opening an account on it (this can be done online). Then, it is just a matter of choosing the type and rates for the BOE, and transfering the money to the institution. It is possible to follow the BOE changes daily, usually in the company’s website. Search for those which waive you from any fees and extras to buy BOEs, and look as many options as you can before choosing the best for invest in (as long as the institution is trustworthy and has a low risk profile).
Even though some BOEs use inflation indexes to calculate interest rates, most use CDI rates for that. Usually they pay 100% of CDI rates or more.
- Daily-based liquidity;
- Pays better than savings accounts and even better than some banking CDs;
- Can be redeemed before its expiration dates;
- Backed by the local guaranty fund (FGC) to the limit of BRL250,000.00 per account;
- The lower investment that can be made in a BOE is actually humble – BRL100.00.
- For them to pay off it’s necessary to hold them for a longer period, or one year at least;
- Income tax incides;
- They are riskier than a bank CD in a large bank, as the issuers for currency bonds are usually smaller institutions.