Discover the Versatility of Negotiable Instruments
A negotiable instrument is a signed document that promises payment to a specific person or assignee. Think of it as a formalized type of IOU—a transferable, signed document that promises to pay the bearer a sum of money at a future date or on demand.
Common Examples: Some popular examples of negotiable instruments include personal checks, cashier’s checks, money orders, certificates of deposit (CDs), promissory notes, and traveler’s checks. The payee, or the person receiving the payment, must be named or indicated on the instrument. Because they are transferable and assignable, some negotiable instruments may even trade on a secondary market.
Key Takeaways
- A negotiable instrument is a signed document that promises a payment to a specified person or assignee.
- They are transferable, allowing recipients to take the funds in cash or use them as they wish.
- Examples include checks, money orders, and promissory notes.
Dive Deeper Into Negotiable Instruments
Negotiable instruments are transferable, permitting the holder to take the money as cash or use it for various purposes. The funds listed on the document include the amount promised, which must be paid in full either on-demand or at a specified time. Once transferred, the holder gains full legal title to the instrument.
These documents do not promise any other obligations from the entity issuing the instrument, nor can any additional instructions or conditions be imposed for the bearer to receive the stated amount.
For an instrument to be negotiable, it must be signed by the maker, or the individual issuing the draft, known as the drawer of funds. Essentially, ’negotiable’ means that the note can be transferred or assigned to another party, unlike ’non-negotiable’ which is firmly established and cannot be altered.
Real-World Examples of Negotiable Instruments
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Personal Checks: This is the most well-known negotiable instrument. A personal check is payable by the payer’s financial institution once it’s received, reflecting the specified amount.
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Cashier’s Checks: Similar to personal checks, but require the payee’s funds to be allocated before the check is issued.
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Money Orders: Similar to checks but may or may not be issued by the payer’s financial institution. Typically, cash must be received from the payer before a money order is issued.
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Traveler’s Checks: Differ from other checks as they require two signatures—the first at the time of issue, and a countersignature upon payment. These are commonly used for additional security during international travel.
Other common forms include bills of exchange, drafts, and certificates of deposit (CDs).
The Role and Utility of Negotiable Instruments
Negotiable instruments promise payment to a specified person or assignee. Given their transferability, holders can convert them to cash and use the money as they see fit.
The Core Benefits
The primary benefit is their easy transferability—minimal paperwork and formalities are involved. Ownership can be transferred simply by delivery or a valid endorsement.
The Two Main Classes
- Order to Pay: Includes items like drafts and checks.
- Promise to Pay: Encompasses promissory notes and certificates of deposit.
In Conclusion
Negotiable instruments, such as personal or cashier’s checks, promise the payment of a specified amount to a person or entity. They are characterized by ease of transfer, either through delivery or valid endorsement. Common types include personal checks, cashier’s checks, traveler’s checks, money orders, promissory notes, and CDs.
Related Terms: Checks, Certificates of Deposit, Promissory Notes, Money Orders, Banking.
References
- Cornell Law School - Legal Information Institute. “Negotiable Instrument”.
- Republic Bank. “Traveler’s Checks: A Guide for the Modern Globetrotter”.
- Cornell Legal Information Institute. “Negotiable Instruments Law: An Overview”.
