CBAD 345 EXAM 3

Maker

One who promises to pay a fixed amount of funds to the holder of a promissory note or a certificate of deposit (CD).

What section of the UCC outlines instruments?

Section 3-104

Drawer

The party that initiates a draft (writes a check, for example), thereby ordering the drawee to pay.

Drawee

The party that is ordered to pay a draft or check. With a check, a financial institution (such as a bank) is always the drawee

trade acceptance

Type of draft that is frequently used in the sale of goods: the seller of the goods is both the drawer and the payee, the buyer to whom credit is extended is the drawee

Requirements for negotiability: Unconditional Promise or Order to Pay

1. Promise - an express, written promise included in the writing on the face of the instrument "I promise to Pay Alvarez $1,000 on demand for the purchase of these goods." 2. Order - an express, written order that clearly directs/commands a third party to pay the instrument as drawn "Pay"

A promise or order is Conditional and therefore, not negotiable if it states any of the following:

1. an express condition to payment 2. that the promise or order is subject to or governed by another writing or record 3. that the rights or obligations with respect to the promise or order are stated in another writing or record

What requirements must an instrument meet to be negotiable?

1. be in writing 2. be signed by the maker or the drawer 3. be an unconditional promise or order to pay 4. state a fixed amount of money 5. be payable on demand or at a definite time 6. be payable to order or to a bearer, unless the instrument is a check

Acceptor

A drawee that accepts, or promises to pay, an instrument (when it is presented later/comes due for payment)

EXAMPLE: On April 30, Laurence & Margaret Roberts sign a writing unconditionally promising to pay "to the order of" the FN Bank $3,000 with 5% interest on or before June 29. This is an example of what?

A promissory note

negotiable instrument (commercial paper)

A signed writing (record) that contains an unconditional promise or order to pay an exact sum of money, on demand or at a specified future time to a specific person or order, or to a bearer: classified as promises to pay or orders to pay

Promissory note

A written promise made by one person (the maker) to pay a fixed sum of money to another person (the payee or a subsequent holder) on demand or on a specified date

Draft

Any instrument (such as a check) drawn on a drawee (such as a bank) that ORDERS the drawee to pay a certain sum of money, usually to a third party (the payee), on demand or at a definite future time.

EXAMPLE: Time Draft On January 16, ABC Real Estate orders $1,000 worth of office supplies from ET Supply Company, with payment due in 90 days. Also on January 16, ABC sends ET a draft drawn on its account with the FN Bank as a payment. In this scenario, who is the drawer, drawee, & payee?

Drawer - ABC Real Estate Drawee - FN Bank (ABC's current bank) Payee - ET Supply Company

time draft

a draft payable at a specified future date

Types of promissory notes: an installment note

a note payable in installments, such as installment payments for a flat-screen tv over a 12 month period

Types of promissory notes: a collateral note

a note secured by personal property, such as an automobile; the property pledged as security for the satisfaction of a debt is called collateral

Payee

a person to whom an instrument (such as a check) is made payable: the person receiving the $$$

EXAMPLE: Z's Bistro buys its restaurant supplies from ABC Industries. When Z's requests supplies, ABC creates a draft ordering Z's to pay them for the supplies within 90 days. Z's accepts the draft by signing its face, which obliges it to make a payment. This is an example of what?

trade acceptance

Requirements for negotiability: Payable at a definite time

an instrument is payable at a definite time if it states any of the following: that it is payable 1. on a specified date 2. within a definite period of time (such as 30 days) after being presented for payment 3. that is payable on a date or time readily ascertainable at the time the promise or order is issued

For the drawee (the bank) to be obligated to honor (pay) the order (as demanded by a draft or check), the drawee must:

be obligated to the drawer (the party creating the draft or check & signing it) either by agreement or through a debtor creditor relationship

A negotiable instrument can function as a substitute for:

cash or as an extension of credit

Orders to pay

drafts and checks

What are the four types of negotiable instruments as outlined by the UCC?

drafts, checks, promissory notes, and certificates of deposits (CDs)

For a negotiable instrument to operate PRACTICALLY as either a substitute for cash or a credit device, it is essential that the instrument be:

easily transferable without danger of being uncollectible

Requirements for negotiability: Signatures

instruments must be signed by: 1. the maker - for a promissory note or CD 2. the drawer - for a draft or check signatures include any symbol executed or adopted by a person with the intent to authenticate a written or electronic document

Requirements for negotiability: Written Form

instruments must possess quality & certainty that only formal, written expression can give: 1. the writing must be on material that lends itself to PERMANENCE (be permanent in nature) 2. the writing must have PORTABILITY (be movable)

Requirements for negotiability: A fixed amount of money

instruments must state with certainty a fixed amount of money to be paid at anytime the instrument is payable: must be in payable in MONEY

Requirements for negotiability: Payable on demand

instruments that contain the words "payable at sight" or "payable upon presentment" presentment = a demand made by or on behalf of a person entitled to enforce an instrument to either pay or accept the instrument

A time instrument is:

payable at a future date

A demand instrument is:

payable on demand (it is payable immediately after it is issued & for a reasonable period of time thereafter)

sight draft (demand draft)

payable upon presentation to the drawee (usually a bank) for payment

Promises to Pay

promissory notes and certificates of deposits (CDs)

Acceptance

the drawee's written promise/agreement to pay the draft when it comes due (usually by writing the word accepted on the draft with a date & signature)

Check

the most commonly used type of draft (demand instrument): a draft drawn by a drawer ordering the drawee bank or financial institution to pay a certain amount of funds to the payee on demand