Risk Management Basics
- Fixed Income
- Credit Analysis | What Credit Analyst Look for? 5 C's | Ratios
- Equity Research vs Credit Research - Know the difference!
- Yield Curve Slope, Theory, Charts, Analysis (Complete Guide)
- Bond Pricing
- Coupon Bond
- Coupon Bond Formula
- Zero Coupon Bond
- Duration Formula
- Coupon Rate Formula
- Carrying Value of Bond
- Sinking Fund Formula
- Coupon Rate of a Bond
- Convertible Securities
- What are Treasury Bills?
- Repurchase Agreement
- Treasury Bills vs Bonds
- Coupon vs Yield
- Coupon Rate vs Interest Rate
- Credit Rating Process | A Complete Beginner's Guide
- Asset Backed Securities (RMBS, CMBS, CDOs)
- Loss Given Default - LGD | Examples, Formula, Calculation
- Top 7 Best Fixed Income Books
- ABS and MBS Index | Complete Beginner's Guide
- Top 10 Best Treasury Management Book
- Top 10 Best Credit Research Books
- Convexity of a Bond | Formula | Duration | Calculation
- Payment in Kind Bond | PIK Definition | Interest | Example
- Subordination Debt | Meaning | Example | Types | Risks
- Top 10 Best Books - Bonds Market, Bond Trading, Bond Investing
- Bonds vs Debentures
- Secured vs Unsecured Loan
- Bills of Exchange vs Promissory Note
- Bills of Exchange | Meaning | Examples | Top Features
- Promissory Notes
- Secured Loans
- Unsecured Loans
- Subordinated Debt
- Fallen Angel
- Bond Equivalent Yield Formula
- Junior Tranche
- Credit Analyst Interview Questions and Answers
- Debt Covenants | Bond Covenant Examples | Positive & Negative
- Negative Covenants (Restrictive)
- Sinking Fund
- Bond Sinking Fund
- Negotiable Instruments
- Credit Spread
- Bond Pricing Formula
What are Negotiable Instruments?
Negotiable Instruments are a document that promises to pay a certain sum of money to the bearer or assignee either at a specific future date or on demand. Negotiable Instrument is generally a signed document which is freely transferable in nature and once it is transferred, a transferee or the holder of an instrument will get legal right to use it in whatsoever manner as he deems appropriate.
- There are so many types of negotiable instruments those are primarily in use such as Promissory Notes, Cheques, Bills of Exchanges, Currencies etc.
- In India, The Negotiable Instruments Act, 1881 was originally enforced to govern the practices of using the above instruments in an effective way including rights, duties, and obligations of parties involved in the transactions.
- People face ease in doing businesses due to the availability of various types of negotiable instruments which are very reliable and having different unique features.
Negotiable Instruments Meaning
Negotiable Instruments are a written order which guarantees the payment of money on a pre-determined date or on demand of the party name on it or to any other person in order or the bearer of an instrument. It has characteristics of a valid contract like consideration should be transferred from one party to another. Negotiable Instruments is nothing but an evidence of indebtedness, as the holder of the instrument has an unconditional right to recover the amount of money stated in the instrument from its maker. These Instruments are used as a substitute of money to safely transfer the payments between the merchants and have a risk free business transactions.
Types of Negotiable Instruments
There are various types of Negotiable Instruments that we use in our daily life and few of them are listed below;
- Promissory Notes
- Bills of Exchange
- Bearer Bonds
We will discuss the above main types of Negotiable Instruments in detail.
#1 – Currencies
Currencies i.e. Bank Notes and Coins are a very common type of Negotiable Instruments which we all use in our daily life as a medium of exchange to settle our trades. The government guarantees and promises to pay a sum of rupees mentioned on the currency note to the bearer thereof. This is a safe medium of exchange against the value of something. We can freely transfer the currencies from one person to another in consideration of something. The bearer of the banknote is a legal owner of the amount mentioned on it and he obtains a promise to receive goods, services or any other things in consideration of the amount of note he possessed. This is a very safe and most liquid type of asset or property and generally has no expiry date, hence stored for the emergency. However, the currencies have the greatest risk of stolen by the thefts or damage in use, so these have to be handled with proper care.
#2 – Cheques
The Cheques are the substitute of the currencies and a very safe mode of transfer of payments among the merchants. It can either be a bearer cheque and one who possesses that will get the amount mentioned on it or an account payee cheque endorsed in the name of the particular entity. Unlike currencies, it generally has a specific expiry date and hence can’t be stored for a longer time period. It has no risk of stolen unless it is a bearer cheque. A Cheque generally takes time to transfer funds in the accounts of the beneficiary and hence it is considered as the less liquid form of transfer.
#3 – Promissory Notes
A Promissory Note means one party (the maker) promises to pay a sum of rupees to a person whose name is mentioned on the note on a fixed future date. Generally, it is used as short-term trade credit and the maker will pay the due amount on or before the expiry of the note. It is also a very safe mode of transferring money and business people frequently use it to have smooth business transactions. One can claim his fund in the court of law on mere non-delivery of promised money to him after the expiry of the term. It is also considered and used as debt instrument and corporation who need to finance their short-term projects will issue the promissory notes.
#4 – Bills of Exchanges
Bills of Exchanges are similar to promissory notes where one party promises to pay the sum of money to other party or to any other person in his order on a fixed future date. Just like promissory note, business people use it to provide short-term trade credits to their business partners. The person on whose name it is endorsed (the Drawee) will have the valid claim on the bill writer (the Drawer) for the amount mentioned on the bill. In case of urgency of a fund, the Drawee can discount his bill before the due date from any bank and get the bill amount from the bank after deducting some discount on it and thereafter bank will collect the full billing amount from the Drawer on the due date and this entire transaction is called as Bill Discounting.
#5 – Bearer Bonds
These are the unregistered bonds issued by the Government or Corporate and as the name suggest the holder of the bond is entitled to get a coupon and principal payment thereon. The issuer doesn’t keep the record of the original owner of the bond. Whoever has the physical possession of the bond will be treated as the legal owner of it. Therefore, there is a huge risk of loss, theft or otherwise destruction of these bonds.
The Negotiable Instruments are very effective business channels in the financial market of any country. Negotiable Instruments helps in smoothing secured commercial and other transactions for money or monies worth. The unique features like transferability, the legality of documents, safety, liquidity etc make them more popular in having businesses domestically and globally as well.
However, in today’s modern world technology bring the businesses at a very high level and use of above Negotiable Instruments is reducing day-by-day. There are so many effective banking channels are established now that will reduce the time and cost of execution of commercial transactions worldwide. Now a day people are more comfortable to do transactions through Internet Banking, NEFT, RTGS, Debit & Credit Cards, Virtual Cards, and availability of so many modern instruments that may cause the end of traditional Negotiable Instruments.
This has been a guide to what are Negotiable Instruments?. Here we discuss the meaning of negotiable instruments, top 5 types of Negotiable Instruments including promissory notes, currencies, bearable bonds, bills of exchange and cheques. You may also take a look at the following articles to learn more –