Module 28
Commercial Paper
Negotiable Instruments
Commercial Paper
Types of Commercial Paper
Note
- Two-party instrument: Maker and payee
- Promise to pay
- Examples: Promissory note, and certificate of deposit
Draft
- Three-party instrument: Drawer, drawee, and payee
- Order to pay
- Examples: Trade acceptance—draft used for a sale of goods; Check—draft drawn on a bank and payable on demand
Requirements for Negotiability
For commercial paper to be negotiable, certain requirements must be met. It must be
- Payable at a fixed time or on demand
- For a certain amount
- Payable in money
- Payable to order of a specific party or to bearer (not required for checks)
- Contain an unconditional promise to pay or an unconditional order to pay
- Signed by the maker or drawer
- Famous instruments are negotiable instruments
Transfers of Negotiable Instruments
Transfer may be made by
- Negotiation—Transferee has same rights as transferor or superior rights
- Bearer paper—Negotiated by delivery alone
- Order paper—Negotiated by delivery and endorsement
Types of Endorsements
Blank—Signature of payee, converts order paper to bearer paper
Special—Specifies endorsee, paper becomes payable to order of endorsee
Qualified—Contains words of qualification, such as “without recourse”
- Does not restrict further negotiation
- Endorser does not guarantee payment upon dishonor
- Endorser with knowledge of defense against instrument will be liable
Restrictive—Places conditions on payment to subsequent endorsee
Does ...
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