BEC - Negotiable Instruments Lesson

Negotiable Instruments

Negotiable means transferable. An instrument can be any agreed-upon medium of exchange. So, a negotiable instrument is any written order to pay a sum of money either to the bearer or to a specific person. An instrument is negotiable because it can be used for value and as a medium of exchange. Let's take a look at the most common forms of negotiable instruments. Roll your mouse over each of the elements of negotiability to learn about them.

Checks

A check is the most common form of a negotiable instrument. A check is called a three-party instrument because it constitutes an agreement among the payee, the drawer, and the drawee.

Drafts

Similar to checks, drafts are also three-party instruments with a payee, a drawer, and a drawee.   Unlike a check, the drawee for the draft does not have to be a bank, it can be a specific person.   Drafts may be sight, time, or trade acceptance drafts. While the treatment of a draft is very similar to the treatment of a check, drafts are used for the purchase of goods and services when the transaction would not meet the requirements of U.S. banking laws.

Notes

Also referred to as promissory notes, notes are two-party instruments that constitute an agreement to pay either at a specific time or on-demand. Notes are negotiable instruments because they can be traded for goods and services or in exchange for debt or for cash. When notes are traded, the terms of the note remain the same - only the payee changes.

Certificates of Deposits

A certificate of deposit or CD is a two-part negotiable instrument that exists between a bank and a depositor. This special type of note is created when a depositor places a deposit with a financial institution that promises to pay back the amount plus an agreed-upon amount of interest at a specific point in time. CDs are used as savings instruments for funds that would not be needed immediately. The time frames for CDs can be from 3 months to 60 months.

 

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