Negotiable Instruments

6
6.1
6.2
6.3
6.4

Negotiable Instruments
Types of Negotiable Instruments
Presenting Checks for Payment
Processing Checks
Changing Forms of Payments
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6.1
Types of Negotiable
Instruments
Learning Objectives
6.1.1 Define the term negotiable instrument.
6.1.2 Identify different types of negotiable
instruments.

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Key Terms
negotiable instrument

bearer instrument
draft
bill of exchange
promissory note

Slide 3

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Negotiable Instruments
Negotiable instrument is a written order or
promise to pay a sum of money, either to a
specified party or to the person who holds it.
What Is Negotiable?
What Is an Instrument?

Slide 4

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 checkpoint
What is a negotiable instrument?
A written order or promise to pay a sum of money
to a specified party or to the person who holds it

What is the most common form of negotiable

instrument?
A check

Slide 5

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Forms of Negotiable
Instruments
Bearer instrument is an instrument which is
payable to whomever holds it.
Checks
Drafts
Draft is an order signed by one party (the drawer,
or drafter) that is addressed to another party (the
drawee) directing the drawee to pay to someone
(the payee) the amount indicated on the draft.
Slide 6

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Standard Features of a Check

Slide 7

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Forms of Negotiable
Instruments (continued)
Bills of exchange are negotiable and
unconditional written orders—such as a check,
draft, or trade agreement—addressed by one
party to another.
Promissory notes are written promises to pay
at a fixed or determinable future time a sum of
money to a specified individual.

Slide 8

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 checkpoint
List the standard features of a personal check.
Check number
Date
Payee
Amount(s)
Signature

Slide 9

Memo

Identification
numbers
Drawee
Drawer

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6.2
Presenting Checks for
Payment
Learning Objectives
6.2.1 Identify bank requirements for honoring
checks.
6.2.2 List common forms of check
endorsements.

Slide 10

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Key Terms
elements of negotiability
holder in due course
blank endorsement
restrictive endorsement
full endorsement

qualified endorsement

Slide 11

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Elements of Negotiability
Elements of negotiability require a check to be
written, signed, and an unconditional promise or
order to pay a fixed amount on demand or at a
defined time.
Holder in due course is a person or financial
institution that acquires a check or promissory
note received in good faith as payment and is
entitled to payment by the drawer of the check or
note.
Slide 12

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Elements of Negotiability
(continued)
Written
Signature
Unconditional Promise or Order
Sum Certain

Payable on Demand or at a Defined Time
Words of Negotiation

Slide 13

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 checkpoint
What is meant by “elements of negotiability”?
Negotiable instruments must meet certain legal
requirements or conditions to be considered
legally valid.

Slide 14

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Endorsement and
Identification
Types of Endorsement
Blank endorsement on a check, is simply the
signature of the holder; the least secure, but
most negotiable, of the four main types of
endorsement.
Restrictive endorsement limits the use of the
instrument to a means specified by the endorser.

Full endorsement transfers a check to another
specified party.
Slide 15

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Endorsement and
Identification (continued)
Types of Endorsement (continued)
Qualified endorsement attempts to limit the
liability of the endorser without limiting an
instrument’s further negotiability.

Identification and Check Acceptance

Slide 16

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Types of Endorsements

Slide 17

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 checkpoint
Name the four main types of check
endorsement.
Blank endorsement
Restricted endorsement
Full endorsement
Qualified endorsement

Slide 18

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6.3
Processing Checks
Learning Objectives
6.3.1 Identify key laws that make today’s
check-clearing process possible.
6.3.2 Explain the sequence of events as a
check is processed for payment.

Slide 19

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Key Terms

float
transit number
returned check

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A National System of Payment
The Legal Structure of the Check Payment
System
Federal Reserve Act of 1913
Uniform Commercial Code of 1958
Expedited Funds Availability Act of 1987
Check 21
Electronic Check Conversion

Slide 21

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 checkpoint
Why does the check processing and collection
system depend on the Federal Reserve?
The Federal Reserve directs and controls the
banking system at large, facilitating

communication, enforcing regulations, and
encouraging standardization.

Slide 22

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Check Payment and
Processing
Float refers to funds that are on deposit at two
institutions at the same time due to inefficiencies
in the collection system; allows a person or firm
to earn extra income because the two institutions
are paying interest on the same funds.
Transit number is a nine-digit number that
identifies the bank that holds the checking
account and is responsible for payment.
Slide 23

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Check Payment and Processing

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Check Payment and
Processing (continued)
Other Types of Check Processing
Returned check is a check written on an
account that does not have adequate funds to
cover it and which is returned unpaid to the
person who deposited it.

Slide 25

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© 2017 Cengage Learning®. All rights reserved.