What You’ll Learn • How to name the parties to each type of negotiable instrument (pp. 506-509)
Why It’s Important Knowing the purpose and types of negotiable instruments will help you manage your financial affairs throughout life.
Section Outline Purposes of Negotiable Instruments Notes Certificates of Deposit Drafts Checks
Pre-Learning Question What is a negotiable instrument?
Purpose of Negotiable Instruments The law of negotiable instruments was developed to allow people to transact business without carrying around large sums of money and to purchase items they will pay for later.
Purpose of Negotiable Instruments A negotiable instrument is a written document giving special legal rights to the transferee that may be transferred by endorsement or delivery.
Purpose of Negotiable Instruments There are two basic kinds of negotiable instruments: • Notes (including certificates of deposit), and • Drafts (including checks)
Pre-Learning Question What is a note?
Notes A note (often called a promissory note) is a written promise by one person, called the maker, to pay money to another person, called the payee.
Notes When two persons sign a note, they are known as comakers.
Notes • A demand note is payable when the payee demands payment. • A time note is payable at a future date, which is written on the face of the note.
23.1 Demand Note
Certificates of Deposit A certificate of deposit (CD) is a note provided by a bank. It’s a bank’s written receipt of money and a promise to pay the money back, usually with interest, on the due date.
Certificates of Deposit CDs are written for a specific time period such as six months, one year, two years, or five years. Banks pay higher interest on longer-term CDs.
Certificates of Deposit The interest paid on a CD is higher than the amount paid on a regular savings or checking account because the depositor cannot withdraw the money before the due date without penalty.
23.1 Certificate of Deposit
Checks A check is a draft drawn on a bank and payable on demand. It is the most common kind of draft in use today.
Checks When issuing a check, you put money in the bank and then order the bank to pay your money to others by writing out checks.
Section 23.1Assessment Reviewing What You Learned • What is the purpose of a negotiable instrument?
Section 23.1Assessment Reviewing What You Learned Answer It allows people to transact business without carrying around large sums of money and to purchase items they will pay for later.
Section 23.1Assessment Reviewing What You Learned • Name the two basic kinds of negotiable instruments.
Section 23.1Assessment Reviewing What You Learned Answer Notes, including certificates of deposit; and drafts, including checks.
Section 23.1Assessment Reviewing What You Learned • Define the parties to each kind of negotiable instrument.
Section 23.1Assessment Reviewing What You Learned Answer The note is a written promise by the maker to pay money to another person (payee). When two people sign a note, they are known as comakers.
Section 23.1Assessment Reviewing What You Learned Answer A draft is an instrument in which one party, called the drawer, orders another party, the drawee, to pay money to a third party, the payee.
What You’ll Learn • How to state the legal effect of a forged indorsement (p. 550) • How to discuss the warranties that you make when you indorse negotiable instruments (p. 550)
What You’ll Learn • How to explain the contract you make when you indorse negotiable instruments (p. 553)
Why It’s Important Understanding the types of indorsements will help you handle your finances wisely.
Section Outline Multiple Payees Forged Indorsements Warranties of Indorsers Contract of Indorsers
Pre-Learning Question What are some different kinds of indorsements?
Main Kinds of Indorsements An instrument is indorsed when you write your name on it, indicating your intent to transfer ownership to another.
Main Kinds of Indorsements Regulation CC, issued by the Federal Reserve Board under the Competitive Banking Act, has established standards for check indorsements.
Main Kinds of Indorsements Under the regulation, the back of a check is divided into specific sections designed to protect the indorsement of the depository bank (the bank of first deposit).
Main Kinds of Indorsements There are four principal types of indorsements, and each fulfills a special purpose. • Blank indorsements • Special indorsements • Restrictive indorsements • Qualified indorsements
Blank Indorsement A blank indorsement consists of the signature alone on the instrument. This type indorsement says, in effect, “This instrument may be paid to anyone.”
25.2 Blank Indorsement
Special Indorsement A special indorsement (also called an indorsement in full) is made by writing the words pay to the order of or pay to followed by the name of the person to whom the instrument is to be transferred (the indorsee) and the signature of the indorser.
Special Indorsement When signed this way, the instrument remains an order instrument and must be indorsed by the indorsee before it can be further negotiated.
25.2 Special Indorsement
Restrictive Indorsement A restrictive indorsement is one in which words have been added, in addition to the signature of the transferor, to limit its use. An example of a restrictive indorsement is “For deposit only.”
25.2 Restrictive Indorsement
Conditional Indorsement A conditional indorsement, a type of restrictive indorsement, makes the rights of the indorsee subject to a specific event or condition.
25.2 Conditional Indorsement
Qualified Indorsement A qualified indorsement is one in which words have been added to the signature to limit the liability of the indorser.
Qualified Indorsement The words without recourse added to an indorsement mean the indorser is not liable in the event the maker or drawer does not pay the instrument.
25.2 Qualified Indorsement
Pre-Learning Question How is a check with multiple payees indorsed?