Chapter 22 Notes

Chapter 22 Notes - Chapter 22 Negotiable instrument a...

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Chapter 22 Negotiable instrument – a signed writing that contains an unconditional promise or order to pay an exact sum on demand or at an exact future time to a specific person or order, or to bearer o UCC Article 3 governs negotiable instruments Drafts and Checks (orders to pay) Draft – instrument drawn on a draw that orders the draw to pay a certain sum of money, usually to a third party (the payee), on demand or at a definite future time Drawer – the party that initiates a draft (such as a check), thereby ordering the drawee to pay Drawee – the party that is ordered to pay a draft or check. With a check, a bank or a financial institution is always the drawee. Payee – a person to whom an instrument is made payable o Time drafts and sight drafts Time draft – payable at a definite future time Sight draft – payable on sight (when presented to the drawee) Acceptance – drawee’s signed agreement to pay a draft when it is presented o Trade acceptance – type of draft that is commonly used in the sale of goods Seller is both the drawer and the payee Buyer is drawee o Check – a draft drawn by a drawer ordering the drawee bank or financial institution to pay a certain amount of money to the holder on demand Checks are demand instruments because they are payable on demand Cashier’s check, bank is both the drawer and drawee Promissory notes and Certificates of deposit (CD) o Promissory Note – a written promise made by one person (the maker) to pay a fixed amount of money to another person (the payee or subsequent holder) on demand or on a specified date o Certificate of deposit (CD) – a note issued by a bank in which the bank acknowledges the receipt of funds from a party and promises to repay that amount, with interest, to the party on a certain date o Maker – one who promises to pay a fixed amount of money to the holder of a promissory note or a CD Requirements for Negotiability 1. Be in writing a. Permanence of the material b. Portability of the writing 2. Be signed by the maker or the drawer 3. Be an unconditional promise or order to pay a. Promise – buyer executes promissory note to promise payment b. Order – directs a third party to pay the instrument 4. State a fixed amount of money a. Gold is not considered a medium of exchange
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5. Be payable on demand or at a definite time a. Acceptor – a drawee that is legally obligated to pay an instrument when it is presented later for payment b. Payable on demand b.i. Presentment – the act of presenting an instrument to the party liable on the instrument in order to collect payment. Presentment also occurs when a person presents an instrument to a drawee for a required acceptance c. Payable at a definite time (if not payable on demand) d. Acceleration clause – a clause that allows a payee or other holder of a time instrument to demand payment of the entire amount due, with interest, if a certain event occurs, such as a default in the payment of an installment when due
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Chapter 22 Notes - Chapter 22 Negotiable instrument a...

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