Commercial Paper Flashcards
What is a PROMISSORY NOTE?
- A Promise to pay a specific amount
- Two Parties
o Maker
o Payee - Example
o Bank Certificate of Deposit (CD) - Can reference other transactions without harming the instrument’s negotiability
What is a Commercial Paper DRAFT?
- Three Parties – Drawer, Payee, Drawee
- Checks
o A Check is a draft that is payable on demand
o Payable to order of drawer or bearer
o Drawer – YOU are writing the check
You keep your checkbook in the desk drawer
o Payee – is whom you are writing the check to
Pay to the order of…
o Drawee is your bank
o All checks are drafts, but not all drafts are checks
o Exam Trick: If it looks like a check, but says ’30 days after date pay to the order…*
Not a Check – they are Payable on Demand o Instead, it’s a Negotiable Time Draft o Not a Post-Dated Check, it’s a Draft o Three parties? Payable on Demand? Check o Three parties? Payable in the future? Draft
What is Trade Acceptance related to Commercial Papers?
o Seller extends credit to Buyer o Buyer agrees to pay Seller Buyer has Primary Liability o Seller is both Drawer and Payee Seller has Secondary Liability
NEGOTIATIONS OF COMMERICAL PAPER?
Transfers ownership to another party
What must happen to maintain negotiability of a Commercial Paper?
o In writing
o Signed by Drawer/Maker
o Be without conditions for payment
Limitations on payment sources allowed
o Amount of money must be stated
If an additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate), it cancels negotiability
If the promise to pay occurs after some action by another party or an event, it cancels negotiability
Cannot allow for an alternative such as payment or some other action by the maker
Renders the paper non-negotiable
A stated amount of payment plus a stated % of interest is OK
o Payable
On Demand (Check)
At a definite time (Draft)
Can’t be based on an uncertain event like someone’s future death or at the date of closing on a property
To order or to bearer
Are notations on document for records purposes allowed on Commercial Papers?
o Writing in Memo section of a check
What is a Blank Endorsement?
Doesn’t name a new payee
Transforms into bearer paper
Think: Blank = Bearer
What is a Special Endorsement?
Names a new payee
Transforms into order paper
What is a Restrictive Endorsement?
Adds restrictions
Doesn’t stop negotiation
You endorse the back of your check For Deposit Only
Restrictive endorsements can’t stop someone from further negotiating an instrument
No Pay to the order of Steve Only
What is a Qualified Endorsement?
‘Without Recourse’ added to endorsement
Payment is not guaranteed
If endorsed, how soon must a check be presented?
A check must be presented for payment within 7 days to hold the endorser liable
If paper is exchanged for value, Transferor must?
Give an Unqualified Endorsement
To negotiate Bearer paper, must have?
Delivery only
To negotiate Commercial Paper?
The stated dollar amount in words supersedes the numerical dollar amount
A check states One Hundred Dollars
The check is written for $1000
One Hundred Dollars wins
What is Contract Liability?
o Guarantees payment
o Primary Liability
o First in line to pay on the note/draft
o Maker of a Promissory Note has primary liability and must pay according to terms of the note
o With a Check, no party has Primary Liability
o Exception: Drawee (your bank) is primarily liable to pay if they certify – i.e. promise to pay
o Secondary Liability
o Drawers are Secondarily Liable if Drawee fails to pay a Draft
o Endorsers (the payee) are secondarily liable
Holder in due course can hold Endorser liable
Exception: Endorsed ‘Without Recourse’
