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Home » Risk Management Tutorials » Fixed Income Tutorials » Negotiable Instruments

Negotiable Instruments

What are Negotiable Instruments?

Negotiable instruments are a type of document that guarantees the payment of a particular amount of money at a set time or on-demand and the payer’s name is generally mentioned on the document and its most common types are checks, promissory notes, bills of exchange, customer receipts, delivery orders, etc.

Brief Explanation

A Negotiable Instrument is generally a signed document that 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.

  • 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 for money to safely transfer the payments between the merchants and have a risk free business transactions.
  • There are so many types of negotiable instruments that 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 business due to the availability of various types of negotiable instruments, which are very reliable and having different unique features.

Negotiable-Instruments

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;

  • Currencies
  • Cheques
  • 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.

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#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 a debt instrument, and corporations 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 another party or to any other person in his order on a fixed future date. Just like a 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 a valid claim on the bill writer (the Drawer) for the amount mentioned on the bill. In case of the 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 suggests, 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, the destruction of these bonds.

Conclusion

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 brings businesses to a very high level, and the use of the 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 doing transactions through Internet Banking, NEFT, RTGS, Debit & Credit Cards, Virtual Cards, and the availability of so many modern instruments that may cause the end of traditional Negotiable Instruments.

Recommended Articles

This has been a guide to what are Negotiable Instruments?. Here we discuss the meaning of negotiable instruments, the 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 –

  • Full-Form of RTGS
  • Bills of Exchange vs. Promissory Note
  • Notes Payable Journal Entry
  • Bonds vs. Debentures Differences
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