1. Discuss the notions of negotiable instruments (hint: function, classification, type,
definition etc. should be included)
2. Discuss the types of Commercial instruments including their distinct character.
3. Discuss the role of negotiable instruments in business transaction.
1. Negotiable instruments are legal documents that serve as a substitute for money in commercial transactions. They are essentially written promises or orders to pay a specific amount of money. Some key aspects of negotiable instruments include:
- Function: The primary function of negotiable instruments is to facilitate the exchange of goods and services by providing a secure and convenient method of payment.
- Classification: Negotiable instruments are classified into two categories: promissory notes and bills of exchange. Promissory notes are written commitments by one party to pay a certain amount of money to another party. Bills of exchange, on the other hand, are written orders by one party to another party, directing them to pay a specific sum of money to a third party.
- Types: Common types of negotiable instruments include checks, drafts, money orders, promissory notes, bills of exchange, and certificates of deposit.
- Definition: A negotiable instrument must meet certain criteria to be considered as such. It must be in writing, signed by the maker or drawer, contain an unconditional promise or order to pay a specific amount of money, be payable on demand or at a specific time, be payable to the bearer or a specified person, and be transferable by negotiation or endorsement.
2. Commercial instruments encompass a wide range of documents used in commercial transactions. Some types of commercial instruments include:
- Promissory Notes: A promissory note is a written promise by one party to pay a specific sum of money to another party at a future date or on demand. It is usually used in lending or borrowing transactions.
- Bills of Exchange: Bills of exchange are written orders by one party (drawer) to another party (drawee), instructing the drawee to pay a specified sum of money to a third party (payee). They are commonly used in international trade and allow for the transfer of funds between parties in different countries.
- Checks: A check is a written order by an account holder to their bank, instructing the bank to pay a specific amount of money to the person or entity named on the check. They are widely used for day-to-day transactions.
- Money Orders: Money orders are similar to checks, but they are prepaid and issued by a financial institution or postal service. They provide a secure method of transferring funds, especially for individuals or businesses without a bank account.
- Certificates of Deposit: Certificates of deposit (CDs) are issued by banks and represent a time deposit with a specified maturity date. They offer a fixed rate of interest and can be transferred before maturity, making them a tradeable instrument.
3. Negotiable instruments play a crucial role in business transactions for several reasons:
- Convenient Payment Method: Negotiable instruments provide a convenient and efficient way to make payments in commercial transactions. They eliminate the need for carrying large amounts of cash and offer a secure mode of payment.
- Transferability: One of the key features of negotiable instruments is their transferability. They can be easily transferred from one person to another by endorsement or negotiation, allowing for the smooth flow of funds and facilitating trade between parties.
- Credibility and Security: Negotiable instruments often carry the guarantee and credibility of financial institutions or reputable companies. This assurance increases the security for both the payee and the payer.
- Record Keeping: Negotiable instruments provide a paper trail of transactions, making it easier for businesses to keep track of their financial records. This documentation is essential for record-keeping, auditing, and financial reporting purposes.
Overall, negotiable instruments serve as a vital tool in conducting business transactions by ensuring the smooth flow of funds, providing a secure payment method, and maintaining financial records.