Copyright South-Western, a division of Thomson, Inc. Slide 1 NEGOTIABLE INSTRUMENTS 5.1 5.1 Types of...

Copyright South-Western, a division of Thomson, Inc. Slide 11

NEGOTIABLE INSTRUMENTS

5.15.1 Types of Negotiable Instruments

5.25.2 Presenting Checks for Payment

5.35.3 Processing Checks

5.45.4 Changing Forms of Payment

55


Lesson 5.1

TYPES OF NEGOTIABLE INSTRUMENTS

Define the term negotiable instrument

Compare and Contrast different types of negotiable instruments

GOALSGOALS


NEGOTIABLE INSTRUMENTSNEGOTIABLE INSTRUMENTSNEGOTIABLE INSTRUMENTSNEGOTIABLE INSTRUMENTS

What is negotiable?Negotiable means transferable – between two

peopleWhat is an instrument?

Any agreed-upon medium of exchange - usually refers to checks, drafts, bills of exchange, promissory notes

Negotiable Instrument – commonly referred to as commercial paper


Commercial PaperCommercial PaperCommercial PaperCommercial Paper

Defined as unconditional written orders or promises to pay money

Checks, drafts, bills of exchange are all considered commercial paper

Legitimacy and use governed by the Uniform Commercial Code (UCC)

May be a bearer instrument or it may be an instrument with highly specified terms


FORMS OF NEGOTIABLE INSTRUMENTSFORMS OF NEGOTIABLE INSTRUMENTSFORMS OF NEGOTIABLE INSTRUMENTSFORMS OF NEGOTIABLE INSTRUMENTS

ChecksDraftsBills of ExchangePromissory Notes


CHECKSCHECKSCHECKSCHECKS

Most common form of negotiable instrumentPreferred method of payment for many debtsOffer convenience, safety, and a record of

transactions


DRAFTSDRAFTSDRAFTSDRAFTS

Three-party instrument – similar to a checkOrder 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.

The payment may be at sight or immediately or at some defined time


BILLS OF EXCHANGEBILLS OF EXCHANGEBILLS OF EXCHANGEBILLS OF EXCHANGE

Negotiable and unconditional written order addressed by one party to another

Receiver of the bill must pay the specified sum or deliver specified goods on demand or at a specified time

Common form of internationally negotiable instrument


PROMISSORY NOTESPROMISSORY NOTESPROMISSORY NOTESPROMISSORY NOTES

Written promise to pay at a fixed or determinable future time a sum of money to a specified individual – legally binding

Two-party instruments - legally binding documents with many specified terms that vary widely


Specialized Forms of Commercial PaperSpecialized Forms of Commercial PaperSpecialized Forms of Commercial PaperSpecialized Forms of Commercial Paper

Certified CheckPersonal check that has been accepted by the bank

before paymentCashier’s Check

Check bank draws on itselfMoney Order

Draft issued by a post office, bank, or telegraph company

Traveler’s Checks


Lesson 5.2

PRESENTING CHECKS FOR PAYMENT

Identify elements of negotiability

Identify and explain common forms of check endorsements

GOALSGOALS


ELEMENTS OF NEGOTIABILITYELEMENTS OF NEGOTIABILITYELEMENTS OF NEGOTIABILITYELEMENTS OF NEGOTIABILITY

WrittenSignatureUnconditional promise or orderSum certainPayable on demand or at a defined timeWords of negotiation


ENDORSEMENT ENDORSEMENT ENDORSEMENT ENDORSEMENT

Endorsement of the instrument allows it to be negotiated

Type of endorsementsBlank endorsementRestrictive endorsementSpecial or full endorsementQualified endorsement


IDENTIFICATION AND CHECK ACCEPTANCEIDENTIFICATION AND CHECK ACCEPTANCEIDENTIFICATION AND CHECK ACCEPTANCEIDENTIFICATION AND CHECK ACCEPTANCE

Banks may require as much or as little identification to cash or deposit a check at they wish

Banks may have different rules for customers and non-customers


Lesson 5.3

PROCESSING CHECKS

Identify three key laws that make today’s check-clearing process possible

Explain the sequence of events as a check is processed for payment

GOALSGOALS


THE CHECK PAYMENT SYSTEMTHE CHECK PAYMENT SYSTEMTHE CHECK PAYMENT SYSTEMTHE CHECK PAYMENT SYSTEM

Three key legislative actsFederal Reserve Act of 1913 - Created a national check

collection system and other rules for paymentsUniform Commercial Code of 1958 - Established consistent

code for transactions, adopted by all 50 states, eliminated wide variation of legal regulation that could hamper national payment system

Expedited Funds Availability Act of 1987 - Regulation CC - combat float abuse practiced by some banks


STANDARD FEATURES OF PERSONAL CHECKSSTANDARD FEATURES OF PERSONAL CHECKSSTANDARD FEATURES OF PERSONAL CHECKSSTANDARD FEATURES OF PERSONAL CHECKS

For simulation use only

Maria Mills12 River StreetPettisville, OH 43553-0177

Pettisville BankPettisville, Ohio

80156-25412

103 7943000801 041200257

$Pay to the order of

Dollars

Date

For

Account NumberAccount Number

Check NumberCheck Number

DateDate

AmountAmountAmountAmount

SignatureSignatureMemoMemo

Identification NumbersIdentification Numbers

PayeePayee


CHECK PAYMENT AND PROCESSINGCHECK PAYMENT AND PROCESSINGCHECK PAYMENT AND PROCESSINGCHECK PAYMENT AND PROCESSING

Drawer - You Payee – Best Buy

Bank of America Wachovia

Federal Reserve(or other intermediary)


Transit NumberTransit NumberTransit NumberTransit Number

Created in 1910 by the ABA 9 digit number identifies the bank where account

is heldAids in check processing procedurePrinted at the bottom left-hand corner of a checkA/K/A routing number, transit/routing number

and ABA number


Other TermsOther TermsOther TermsOther Terms

Postdated checkStale checkReturned check – bounced checkNSF check – non-sufficient funds Stop Payment


Lesson 5.4

CHANGING FORMSOF PAYMENT

Identify modern forms of payment systems

Identify and explain how banks and other financial institutions use automated forms of payment

GOALSGOALS


CONSUMER PAYMENTSCONSUMER PAYMENTSCONSUMER PAYMENTSCONSUMER PAYMENTS

Charge cardsCredit cardsCash cardsDebit cardsSmart cards


CHARGE CARDSCHARGE CARDSCHARGE CARDSCHARGE CARDS

Account must be paid in full at the end of the monthCharge cards, in effect, lend the amount of purchases

for a monthOriginally charge cards were store cards, but eventually

third-party companies formed networks of participating businesses to expand the market

American Express is the most prominent national charge card.


CREDIT CARDSCREDIT CARDSCREDIT CARDSCREDIT CARDS

Consumers allowed to pay all or part of their bills each month and finance the unpaid balance

Using a credit card involves two banks—the bank that issued the card and the retailer’s bank.


CASH CARDSCASH CARDSCASH CARDSCASH CARDS

Cash cards are commonly used at an automated teller machine (ATM).

Consumers can get cash, make transfers and deposits, or perform other banking functions by inserting the card and entering a personal identification number (PIN).


DEBIT CARDSDEBIT CARDSDEBIT CARDSDEBIT CARDS

Transfer money from a person’s designated account to the account of the retailer

A debit card allows an immediate point-of-sale (POS) transaction

Consumer swipes card through a magnetic reader, enters a PIN, and authorizes transfer


SMART CARDSSMART CARDSSMART CARDSSMART CARDS

Credit, debit, or other types of cards with embedded microchips

Microchips store values and use the embedded logic to change values and record transactions


FUTURE PAYMENT SYSTEMSFUTURE PAYMENT SYSTEMSFUTURE PAYMENT SYSTEMSFUTURE PAYMENT SYSTEMS

E-checksDigitally guaranteed type of electronic check to be

transmitted on the InternetObstacles – security issues and mutual acceptability

networks

Electronic tokensMonetary system based on the exchange of digital

moneyObstacles – counterfeiting and resistance


BANK PAYMENTSBANK PAYMENTSBANK PAYMENTSBANK PAYMENTS

Electronic funds transfer (EFT)Common form - direct depositAutomatic payments – bank makes payments to specified

recipient (reverse of direct deposits)

Automated clearing houses (ACHs) – magnetic tapes with data exchanged between banks

Online transfersFedwire – run by Fed Reserve, handles transfers for federal

funds, interbank dealings, and securities transactionsClearing House Interbank Payment System (CHIPS)


THE LEADING EDGETHE LEADING EDGETHE LEADING EDGETHE LEADING EDGE

Digital imagingPotential to save banks millions per year in storage,

record keeping, postage, and labor costs

Electronic check presentment (ECP)Device reads account info from magnetic inkInfo immediately transmitted to the paying bankProcess virtually eliminates bad checks and float

Copyright South-Western, a division of Thomson, Inc. Slide 1 NEGOTIABLE INSTRUMENTS 5.1 5.1 Types of...

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