Negotiable Instruments Created By: Laura Kinchen
Negotiable Instruments • What is negotiable? • Negotiable means transferable. • The negotiation that goes on refers to the transfer of the instrument between two people, or from one bank to another, or even from one country to another. • What is an instrument? • In the broadest sense, almost any agreed-upon medium of exchange could be considered a negotiable instrument. • In day-to-day banking, a negotiable instrument usually refers to checks, drafts, bills of exchange, and some types of promissory notes.
Forms of Negotiable Instruments A negotiable instrument is a written order promising to pay a sum of money. It may be a bearer instrument, which is payable to the bearer, or it may be an instrument with highly specified terms.
What Makes a Document Negotiable A document becomes negotiable when it contains an unconditional promise to pay money and is payable to a bearer or payable on demand.
Negotiable Instruments To qualify as a negotiable instrument (commercial paper), the document must meet certain requirements established by Revised Article 3 (Negotiable Instruments) of the Uniform Commercial Code (UCC).
Functions of Negotiable Instruments • Negotiable instruments serve the following functions: • Substitute for money • Credit device • Record-keeping device • Most purchases by businesses and many individuals are made by negotiable instruments instead of cash.
Types of Negotiable Instruments Checks (cashier’s & traveler’s) Drafts Certificates of Deposit Promissory Notes
According to UCC 3-104(a), a negotiable instrument must: Be in writing Be signed by the maker or drawer Be an unconditional promise or order to pay State a fixed amount of money Not require any undertaking in addition to the payment of money Be payable on demand or at a definite time Be payable to order or to bearer
Checks Most common form of negotiable instrument Preferred method of payment for many debts Offer convenience, safety, and a record of transactions
801 Maria Mills 12 River Street Pettisville, OH 43553-0177 56-25 412 Date Pay to the order of $ Dollars Pettisville Bank Pettisville, Ohio For simulation use only For 000801 103 7943 041200257 Standard Features of a Check Check Number Date Payee Amount Amount Signature Memo Identification Numbers Account Number
Savings Bond U.S. Savings Bonds Another savings option is purchasing a U.S. Savings Bond. The maturity date of a bond depends on: • The date it was bought • The interest rate the bond is earning Your bond’s worth will depend on current interest rates and on the month and year in which the bond was issued.
Bank Drafts A draft is a three-party instrument similar to a check. A draft is an order signed by one party (the drawer, or drafter) that is addressed to another party (the drawee) directing the drawee to pay to someone (the payee) the amount indicated on the draft. The payment may be at sight or at some defined time. Most drafts are used for the purchase of goods and services when the transaction goes beyond the bounds of U.S. banking law.
Life cycle of a check Writing Checks Before writing a check, use your check register to record the: • Date • Number of the check • Name of the party who will receive the payment • Exact amount of the check Be sure to keep a current balance of the money you have by deducting from or adding to your balance the amount of any check transaction.
Types of Deposit Accounts • Savings accounts: simplest type of account to open and maintain, usually requiring minimum balances, sometimes very small, to avoid fees • main drawback is that they typically pay very low interest or dividend rates. • Basic Checking Accounts: interest- or dividend-paying features, again usually requiring minimum balances • Interest-Bearing Checking Account: • able to write an unlimited number of checks • interest rate often depends on how large the balance in the account
Types of Deposit Accounts • Money Market Accounts: your deposits earn based on the performance of a portfolio, or mutual fund, of large money market securities such as commercial paper, Treasury bills, banker's acceptances, and negotiable certificates of deposit • Requires minimum balances that usually are higher than that required of regular savings accounts, but often pay the highest interest or dividend rates • Central Asset Account: account that combines savings, checking, credit/debit card services, and a line of credit in one wide-reaching account. • CD’s (certificate of deposit): also known as "time deposits", because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years • Since you won’t be able to touch the money for the specified time, you get a higher interest rate • Substantial penalty for taking the money out early
Checking accounts The most commonly used payment service is a checking account. Money that you place in a checking account is: • Called a demand deposit • Able to be withdrawn at any time, or on demand Checking accounts can be divided into three main categories: • Regular accounts • Activity accounts • Interest-earning accounts • Write checks to pay bills or buy goods or services • Linked to an ATM/Debit card
Opening a Checking Account Opening a Checking Account Before you open a checking account, decide whether you want: • An individual account • A joint account Personal joint accounts are usually “or” accounts, which means that only one of the owners needs to sign a check.
Regular Checking Account Regular checking accounts usually do not require a minimum balance. You may have to pay a monthly service charge, however, if: • The account requires a minimum balance. • Your account drops below that amount. Some institutions will waive a service charge if you keep a certain balance in your savings account.
Interest Earning Checking Accounts Interest-Earning Checking Accounts Interest-earning checking accounts are a combination of: • Checking accounts • Savings accounts These accounts pay interest if you maintain a minimum balance.
Keeping Track of a Checking Account Keeping Track of a Checking Account Each month your bank will send you a statement that shows your checking account activity for the month. Your bank statement will list: • Deposits • Checks you have written • ATM withdrawals • Debit card charges • Interest earned • Fees The balance reported on the bank statement may be different from the balance in your check register.
Savings Accounts Savings Accounts Regular savings accounts, traditionally called passbook accounts, are ideal if you plan to make frequent deposits and withdrawals. These accounts: • Require little to no minimum balance • Allow you to withdraw money on demand The trade-off for this convenience is that the interest you earn will be low compared with other savings plans. • Earn more money on your deposits • Usually use money only on things you saved for • Can be linked to an ATM/Debit card
Certificates of Deposit • A two-party negotiable instrument that is a special form of note created when a depositor deposits money at a financial institution in exchange for the institution’s promise to pay back the amount of the deposit plus an agreed-upon rate of interest upon the expiration of a set time period agreed upon by the parties.