1. 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

2. 29-1 Basic Types of Commercial Paper
GOALS
Recognize the need for commercial paper
Identify the various types of commercial paper
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3. WHAT IS COMMERCIAL PAPER?
Unconditional written orders or promises to pay money
Demand instrument
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4. TYPES OF COMMERCIAL PAPER
Drafts
Checks
Honor and dishonor
Stop-payment orders
Precautions and care
Promissory notes
Certificates of deposit
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5. DRAFTS
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6. CHECKS
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7. PROMISSORY NOTES
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8. CERTIFICATES OF DEPOSIT
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9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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
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24. SPECIALIZED TYPES OF COMMERCIAL PAPER
Certified checks
Teller’s check
Cashier’s check
Money orders
Traveler’s checks
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25. 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
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26. 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
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27. 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
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28. 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