Meaning of Negotiable Instruments
A negotiable instrument is a written document that represents a promise to pay a specific amount of money to the bearer or a designated person. It is a transferable and enforceable instrument that facilitates commercial transactions. Negotiable instruments are widely used in business and financial transactions as a form of payment or credit. The key characteristics of negotiable instruments include transferability, negotiability, and the ability to be freely traded in the market.
Kinds of Negotiable Instruments
Promissory Note
A promissory note is a written promise made by one party, known as the maker, to pay a specific sum of money to another party, known as the payee, either on demand or at a predetermined future date. It is an unconditional promise to pay and is typically used for borrowing money or extending credit.
Bill of Exchange
A bill of exchange is an instrument that contains an unconditional order, written by one party (the drawer) to another party (the drawee), requiring the drawee to pay a specified sum of money to a third party (the payee). It involves three parties: the drawer, the drawee, and the payee. Bills of exchange are commonly used in international trade and commercial transactions.
Cheque
A cheque is a bill of exchange drawn on a specified banker and payable on demand. It is an instrument instructing a bank to pay a specific amount of money to the bearer or a designated person. Cheques are widely used for making payments in business and personal transactions.
Certificate of Deposit
A certificate of deposit (CD) is a negotiable instrument issued by a bank or financial institution, acknowledging a deposit of funds for a specific period at a fixed interest rate. It represents a promise to repay the deposited amount with interest upon maturity. CDs are commonly used as short-term investments.
Bank Draft
A bank draft is a negotiable instrument issued by a bank on behalf of a customer, directing another bank or its branch to pay a specified sum of money to a designated party. It is often used for secure and guaranteed payment in situations where personal checks may not be accepted.
Treasury Bills
Treasury bills (T-bills) are negotiable instruments issued by the government to raise funds. They represent a promise to pay a specified amount at a future date with a fixed interest rate. T-bills are typically short-term instruments with maturities ranging from a few days to one year and are commonly used in government financing and money market investments.