What is a negotiable instrument?
A negotiable instrument is a signed document that promises a sum of payment to a specified person or to the assignee. In other words, it is a form of formalized acknowledgment of debt: a transferable and signed document that promises to pay the bearer a sum of money at a future date or upon request. The payee, who is the person receiving the payment, must be named or otherwise indicated on the instrument.
Because they are transferable and transferable, certain negotiable instruments can be traded on a secondary market.
Key points to remember
- A negotiable instrument is a signed document that promises a sum of payment to a specified person or to the assignee.
- The negotiable instruments are transferable in nature, allowing the holder to take the funds in cash or use them in an appropriate manner for the transaction or according to their preference.
- Common examples of negotiable instruments include checks, money orders and promissory notes.
Understanding negotiable instruments
The negotiable instruments are transferable in nature, allowing the holder to take the funds in cash or use them in an appropriate manner for the transaction or according to their preference. The amount of the fund indicated on the document includes an indication of the specific amount promised and must be paid in full either on request or at a specified time. A negotiable instrument can be transferred from one person to another. Once the instrument is transferred, the holder obtains a full legal title on the instrument.
These documents do not provide any other promises from the entity that issued the negotiable instrument. In addition, no other instruction or condition may be imposed on the holder to receive the monetary amount indicated on the negotiable instrument. For an instrument to be negotiable, it must be signed, with a mark or signature, by the manufacturer of the instrument – the one who issued the project. This entity or person is known as the fund drawer.
The term negotiable refers to the fact that the note in question may be transferred or assigned to another party; non-negotiable describes one that is firmly established and cannot be adjusted or changed.
Examples of negotiable instruments
One of the most common negotiable instruments is the personal check. It serves as a draft, payable by the financial institution of the payer on receipt on the exact amount specified. Likewise, a bank check performs the same function; however, it requires that the funds be allocated or set aside for the recipient before the check is issued.
Money orders are similar to checks but may or may not be issued by the payer’s financial institution. Often, money must be received from the payer before the money order is issued. Once the money order is received by the recipient, it can be exchanged for cash in a manner consistent with the policies of the issuing entity.
Travelers checks work differently because they require two signatures to complete a transaction. At the time of issue, the payer must sign the document to provide a specimen signature. Once the payer has determined to whom the payment will be issued, a counter signature must be provided as a condition of payment. Traveller’s checks are generally used when the payer travels to a foreign country and searches for a means of payment that offers an additional level of security against theft or fraud while traveling.
Other common types of negotiable instruments include bills of exchange, promissory notes, drafts and certificates of deposit (CD).