Commercial Paper Flashcards Preview

REGULATION > Commercial Paper > Flashcards

Flashcards in Commercial Paper Deck (20):

What is a promissory note?

A promise to pay a specific amount. There are two parties involved - maker and a payee. It can reference other transactions without harming the instruments negotiability. Example: Bank Certificate of Deposit (CD)


What is a draft?

A commercial paper involving three parties- a drawer; a payee and a drawee A drawer orders a sum to be paid to a payee by the drawee May be payable on demand or in the future


What is a check?

A check is a type of draft that is payable ON DEMAND; payable to order of drawer or bearer Drawer - person writing the check Payee - person being paid Drawee - the bank


What is the difference between a post-dated check and a negotiable time draft?

A check is payable on demand; even if post-dated. A negotiable time draft is not payable until the date designated for payment.


What is a trade acceptance?

Seller extends credit to Buyer Buyer agrees to pay Seller - Buyer has primary liability Seller is both Drawer and Payee - Seller has Secondary Liability


What is the purpose of the negotiation of commercial paper?

Transfers ownership to another party


What is required to maintain the negotiability of a commercial paper?

Must be in writing Signed by drawer/maker Be without conditions for payment (other than limitations on payment sources) Amount of money must be stated Payable to order or bearer


What characteristics will cancel the negotiability of a commercial paper?

An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate) 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 Note: a stated amount of payment plus a stated % of interest is OK


What is required to negotiate Order Paper?

Must have delivery and endorsement If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement


What are the major types of endorsements on commercial paper?

Blank - Doesnt name a new payee; transforms into a bearer paper Special - Names a new payee; transforms into an order paper Restrictive - Adds restrictions; doesnt stop further negotiation Qualified - Payment not guaranteed; without recourse added to endorsement


If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?

Within 7 days


On a commercial paper; which value will supersede - words or numerical dollar amount?

Written amount supersedes the numerical dollar amount. For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.


Define primary liability with respect to a contract.

First in line to pay on the note/draft Maker of a Promissory Note has primary liability and must pay according to terms of the note With a Check; no party has Primary Liability Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise to pay


Define secondary liability with respect to contract liability

Drawers are Secondarily Liable if Drawee fails to pay a Draft Endorsers (the payee) are secondarily liable Holder in due course can hold Endorser liable Exception: Endorsed Without Recourse


Define contract liability.

Guarantees payment of a liability


When does warranty liability occur?

Occurs when you negotiate commercial paper By signing; you warrant to all future parties By not signing; you warrant to current party only


What five warranties occur with every commercial paper transfer?

Warranty of Title No defense will stand against it No material alteration No knowledge of bankruptcy proceedings All signatures are legitimate


What are the requirements for a holder to be a holder in due course?

Holding a negotiable instrument Taking instrument in Good Faith - Even if you buy a stolen note and you dont know that its stolen; youre still an HDC Having no knowledge of defenses again instrument; i.e. problems with the instrument Giving a *present value* for the instrument (a future value doesnt count)


What are the personal defenses against a holder in due course (HDC) which will LOSE?

An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC) Lack of consideration/value given Breach of contract/warranty Duplicate payments Fraud (in the inducement only) Voidable contracts


What are the REAL defenses against a holder in due course (HDC); which will WIN?

A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC) Material alterations to the instrument Forgery Bankruptcy Maker not competent to Contract Fraud in the execution