Chapter 29 Commercial Paper 7/3/2018 Chapter 29 Commercial Paper 29-1 Basic Types of Commercial Paper 29-2 Specialized Types of Commercial Paper Chapter 29 LAW

29-1 Basic Types of Commercial Paper GOALS Recognize the need for commercial paper Identify the various types of commercial paper Chapter 29

WHAT IS COMMERCIAL PAPER? Unconditional written orders or promises to pay money Demand instrument Chapter 29

TYPES OF COMMERCIAL PAPER Drafts Checks Honor and dishonor Stop-payment orders Precautions and care Promissory notes Certificates of deposit Chapter 29

DRAFTS Chapter 29

CHECKS Chapter 29

PROMISSORY NOTES Chapter 29

CERTIFICATES OF DEPOSIT Chapter 29

Drafts A draft is a three-party instrument that is an unconditional written order by one party that orders the second party to pay money to a third party. Drawer of a draft Drawee of a draft Payee of a draft © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Drafts (continued) Sight Draft A draft payable on sight. Also called a demand draft. Trade Acceptance – a sight draft that arises when credit is extended with the sale of goods. Time Draft A draft payable at a designated future date © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Checks A distinct form of draft drawn on a financial institution and payable on demand. Drawer of a check Drawee of a check Payee of a check © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Promissory Notes A two-party negotiable instrument that is an unconditional written promise by one party to pay money to another party. Maker of a note Payee of a note Types of notes: Time note Demand note Installment notes © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Promissory Notes (continued) Collateral required Some notes require posting security May be automobiles, homes, buildings, securities, or other property If maker fails to repay note as due, lender can foreclose and take collateral as payment © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Certificates of Deposit (CD) A two-party negotiable instrument Special form of note created when a depositor deposits money at a financial institution Institution promises to pay back the amount of the deposit plus an agreed-upon rate of interest at set time. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Negotiable Instrument Must be: In writing May be combination of writings Permanent Most paper fulfills requirement Portable Ensures free transfer © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Signed by Maker or Drawer Maker or drawer not liable unless signature appears on instrument Agent may sign Any symbol or device may be used if intention was to authenticate document © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Fixed Amount of Money Ensures value of instrument No interest requirement, but may have fixed or variable amount Must be payable in money © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Instruments Payable on Demand or at a Definite Time Demand Instruments Created by special language Created by silence as to payment due date Checks CDs and drafts may be demand instruments Time Instruments Payable at definite time and date © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Additional Clauses Prepayment clause Acceleration clause Allows maker to pay amount before due date Acceleration clause Payee or holder may accelerate payment of principal Extension clause Allows date of maturity to be extended © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Nonnegotiable Contract A promise or order to pay that does not meet the requirements of a negotiable instrument. It is not subject to the provisions of UCC Article 3. A nonnegotiable contract can be enforced under normal contract law. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Additional Requirements Must contain unconditional order to pay or unconditional promise to pay Check or draft CD do not require express promise to pay If conditional, it is not negotiable because of risk of promise or event not occurring © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

29-2 Specialized Types of Commercial Paper GOALS Recognize the various specialized types of commercial paper Compare the functions of the specialized types of commercial paper Chapter 29

SPECIALIZED TYPES OF COMMERCIAL PAPER Certified checks Teller’s check Cashier’s check Money orders Traveler’s checks Chapter 29

PREVENT LEGAL DIFFICULTIES In dealing with commercial paper . . . Be focused when you are drawing or making commercial paper. Giving in to distractions can lead to mistakes that invalidate the paper or make it subject to forgery. Continued on the next slide Chapter 29

PREVENT LEGAL DIFFICULTIES Specific errors in issuing commercial paper include leaving enough blank space for someone to insert figures and words that would change the face amount of an instrument or failing to have one portion of the paper agree with another, such as the amount in numbers with the written amount. If you lend a significant amount of money, get a promissory note in return. Continued on the next slide Chapter 29

PREVENT LEGAL DIFFICULTIES If practical, ask for security for a loan and identify the collateral on the face of the instrument. Use traveler’s checks and credit cards on long trips. Do not carry a lot of cash. Never sign a blank piece of commercial paper. Take care not to let your blank checks be stolen. Any negligence you contribute to the theft may make you liable for any forgeries that occur. Continued on the next slide Chapter 29

PREVENT LEGAL DIFFICULTIES Remember that an oral stop-payment order is good for only 14 days unless confirmed in writing. A written stop-payment order is good for six months and can be renewed. Chapter 29