BLS 112 Chapter 25: Chapter 25

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Binghamton University
Business Law and Society
BLS 112
S U N Y Ulster

Chapter 25: The Function & Creation of Negotiable Instruments I. Types of Negotiable Instruments  Negotiable Instrument: a signed writing/electronic record that contains an unconditional promise or order to pay an exact amount (on demand or at a specific future time) o Substitute for cash or extension of credit (ex. Checks, loans) o Essential  easily transferrable without danger of being uncollectible o Aka “instrument” or “commercial paper” o Demand Instrument: payable on demand (immediately after issue) o Time Instrument: payable at future date  4 types: o Orders to Pay [Drafts and Checks] 1. Draft: unconditional written order • Involves 3 parties o Drawer  party creating the draft o Drawee  pays the money o Payee  3 rdparty getting paid • Time Draft: payable at definite future time • Sight (Demand) Draft: payable when presented to drawee (usually bank or financial institution) o May be payable on acceptance: drawee’s written promise to pay the draft when it comes due • Trade Acceptance: type of draft frequently used in sale of goods o Seller is both the drawer & payee o Buyer (to whom credit is extended) is the drawee o Banker’s Acceptance: draft orders bank to pay 2. Check: most common type of draft • Involves 3 parties: o Drawer  writer of the check o Drawee  bank on which check is drawn o Payee  person to whom check is made payable to • Demand Instrument • Cashier’s Checks: bank is both drawer & drawee o Promises to Pay [Notes and CD’s] 3. Promissory Note: written promise made by one person (maker) to pay another (payee) a specified sum • can be payable at definite time or on demand • evidence of a debt • Commonly Assigned (negotiated or transferred) from one lender (payee) to another • Used as a credit device o Collateral Note: property pledge as security for satisfaction of a debt o Installment Note: note payable in installments 4. Certificates of Deposit (CD): type of note issued when party (payee) deposits funds within a bank (maker) & bank promises to repay funds with interest on certain date • Time Deposit  purchaser-payee not allowed to withdraw funds before maturity date rd • Can negotiate to 3 party to access funds early • Small CD’s (
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