Module 28

Commercial Paper

Negotiable Instruments

Commercial Paper

Types of Commercial Paper


  • Two-party instrument: Maker and payee
  • Promise to pay
  • Examples: Promissory note, and certificate of deposit


  • 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
    1. 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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