A negotiable instrument is a written document that can be transferred from one party to another as a substitute for money. It is a legal contract that guarantees the payment of a specified amount of money to the holder or the payee. There are several types of negotiable instruments, including:
Cheques:
A cheque is a negotiable instrument used to transfer funds from one bank account to another. It is a written order from the account holder to the bank to pay a certain sum of money to the person named on the cheque.
Features
A cheque is a negotiable instrument used to transfer funds from one bank account to another.
Cheques provide a convenient way to transfer funds between parties and are widely used in business transactions. They offer a level of security and certainty in financial transactions, as the payment is guaranteed by the bank on which the cheque is drawn. However, there are also risks associated with cheques, such as the possibility of fraud, insufficient funds, or bounced cheques.
- Written Order: A cheque is a written order from the account holder to the bank, instructing the bank to pay a specified amount of money to the person named on the cheque.
- Payment on Demand: A cheque is payable on demand, which means that the payee can present the cheque for payment at any time after it is issued.
- Drawer, Payee, and Drawee: A cheque involves three parties – the drawer (the person who writes the cheque), the payee (the person to whom the cheque is payable), and the drawee (the bank on which the cheque is drawn).
- Amount and Date: A cheque must have a specified amount written in both words and figures, and it must also have a date on which it is issued.
- Signature: A cheque must be signed by the drawer, and the signature must match the signature on record with the bank.
- Crossing: A cheque can be crossed, which means that it can only be paid into a bank account and cannot be encashed over the counter.
- Bearer or Order: A cheque can be made payable to either the bearer (anyone who presents the cheque) or to a specific person (i.e. order cheque).
- Cancelled Cheque: A cancelled cheque is one that has been marked as cancelled by the account holder. It can be used as proof of account ownership or for direct deposit purposes.
Promissory Notes
A promissory note is a written promise to pay a specified amount of money to the holder or the payee. It is a signed document that includes the amount to be paid, the date of payment, and the terms and conditions of the loan.
Features
A promissory note is a negotiable instrument that contains a written promise to pay a specified amount of money to the holder or the payee.
Promissory notes provide a legal document that can be used to establish a debt obligation between two parties. They offer flexibility in terms of repayment terms, interest rates, and the ability to trade the notes in the market. However, there are risks associated with promissory notes, such as the possibility of default by the promisor or the risk of the promissory note being dishonored due to insufficient funds.
- Written Promise: A promissory note is a written promise to pay a specified amount of money to the holder or the payee.
- Unconditional Promise: The promise to pay on the promissory note is unconditional, which means that the payee is entitled to receive the specified amount of money without any conditions or qualifications.
- Signed by the Promisor: The promissory note is signed by the person who is making the promise to pay, also known as the promisor.
- Fixed Amount and Date: The promissory note specifies a fixed amount of money that is to be paid, and a date by which the payment must be made.
- Interest: The promissory note may also specify an interest rate that will be applied to the principal amount of the loan.
- Transferable: Promissory notes are transferable instruments, which means that they can be bought and sold in the market.
- Negotiable: Promissory notes are negotiable instruments, which means that they can be traded in the market like cash.
- Alternative to Bank Loans: Promissory notes are often used as an alternative to bank loans for small businesses or individuals.
Bills of Exchange
A bill of exchange is a written order from one party to another to pay a specified amount of money to a third party on a certain date or on demand. It is often used in international trade transactions and can be either a sight bill or a time bill.
Features
A bill of exchange is a negotiable instrument used in international trade to transfer funds from one country to another.
Bills of exchange provide a mechanism for international trade transactions by providing a secure method of payment that can be trusted by all parties involved. They are often used to finance international trade and can be used to provide short-term financing for businesses. However, there are risks associated with bills of exchange, such as the possibility of non-payment by the drawee, currency fluctuations, and political risks in the country where the payment is being made.
- Written Order: A bill of exchange is a written order from the creditor (drawer) to the debtor (drawee) to pay a specified amount of money to the creditor or a third party (payee).
- Payment at a Future Date: A bill of exchange is payable at a future date, which is specified on the bill.
- Three Parties Involved: A bill of exchange involves three parties – the drawer (creditor), the drawee (debtor), and the payee (recipient of payment).
- Signature: A bill of exchange must be signed by the drawer, and the signature must match the signature on record with the bank.
- Fixed Amount and Date: A bill of exchange specifies a fixed amount of money that is to be paid, and a date by which the payment must be made.
- Acceptance: The drawee must accept the bill of exchange before it becomes a binding obligation to pay.
- Transferable: Bills of exchange are transferable instruments, which means that they can be bought and sold in the market.
- Negotiable: Bills of exchange are negotiable instruments, which means that they can be traded in the market like cash.
Bank Drafts
A bank draft is a type of cheque issued by a bank on behalf of its customers. It is a guaranteed payment instrument, as the bank assumes liability for the payment of the amount specified on the draft.
A bank draft is a type of payment instrument that is issued by a bank on behalf of a customer, and it guarantees payment to the recipient. Some of the key features of bank drafts are as follows:
- Issued by a Bank: A bank draft is issued by a bank, and it guarantees payment to the recipient.
- Payment on Demand: A bank draft is payable on demand, which means that the recipient can present the draft to the bank and receive the payment immediately.
- Fixed Amount: A bank draft specifies a fixed amount of money that is to be paid.
- Prepaid: A bank draft is prepaid, which means that the funds are already deducted from the customer’s account when the draft is issued.
- Signed by the Bank: A bank draft is signed by the issuing bank, which confirms that the bank has guaranteed payment.
- Non-Transferable: Bank drafts are non-transferable, which means that they cannot be transferred from one person to another.
- Safe Payment Method: Bank drafts are considered a safe payment method because they are issued by a bank, and the payment is guaranteed.
- Used for Large Transactions: Bank drafts are often used for large transactions, such as real estate transactions or business-to-business payments.
Certificate of Deposit
A certificate of deposit (CD) is a negotiable instrument issued by a bank to its customers. It represents a deposit with the bank for a specified period, and the customer receives a fixed rate of interest on the deposit.
A Certificate of Deposit (CD) is a financial product that is issued by a bank or financial institution to a customer in exchange for a deposit of funds for a fixed period of time. Some of the key features of a Certificate of Deposit are as follows:
- Fixed Term: A Certificate of Deposit has a fixed term, which can range from a few months to several years. During this period, the customer cannot withdraw the funds without incurring a penalty.
- Fixed Interest Rate: A Certificate of Deposit offers a fixed interest rate that is typically higher than the interest rate offered on savings accounts or checking accounts. The interest rate is determined at the time of purchase and remains fixed for the duration of the term.
- Minimum Deposit: There is usually a minimum deposit required to purchase a Certificate of Deposit, which can vary depending on the financial institution.
- FDIC Insured: Certificates of Deposit are FDIC insured up to a certain amount, which provides protection to the customer in case the bank or financial institution becomes insolvent.
- Non-Transferable: Certificates of Deposit are non-transferable, which means that they cannot be transferred to another person or used as collateral for a loan.
- Penalty for Early Withdrawal: If the customer withdraws the funds before the end of the term, they will incur a penalty that is typically a percentage of the interest earned or a fixed amount.
- Low Risk: Certificates of Deposit are considered a low-risk investment because they are FDIC insured and provide a fixed interest rate.
- Used for Long-Term Savings: Certificates of Deposit are often used for long-term savings goals, such as retirement, education, or buying a home.
These negotiable instruments can be used to facilitate the transfer of funds between parties, and they provide a level of security and certainty in financial transactions. They can be bought and sold in the market, and their value can fluctuate based on various factors such as interest rates, economic conditions, and market demand.