Business Law - Types of Negotiable Instruments

Hey, thanks for joining me for this lecture. We're going to be getting into an essential aspect of commercial law, which is known as negotiable instruments as they're recognized by the Uniform Commercial Code or UCC. Now, negotiable instruments are crucial for facilitating financial transactions and providing a framework for the transfer of rights and obligations. Now, we're going to explore three main types or four main types rather, recognized by the UCC, including checks, promissory notes, drafts, as well as certificates of deposit or CDs.

Now, before we go into the different types of negotiable instruments, I want to draw the distinction between what we call time instruments as well as demand instruments. These are two fundamental categories within negotiable instruments. And so we're going to dive into those differences. Now, on one hand, we have time instruments.

Now, these types of instruments specify a future date of payment where the issuer typically will commit to fulfilling the payment obligation at a predetermined time. This offers a little bit more flexibility in terms of the payment deadline where parties might agree on a date that aligns with maybe a certain business cycle or financial planning. A common example of time instruments that will explore include promissory notes that typically have a maturity date or certificates of deposit that have a specified term in which the party that holds that certificate of deposit is then the funds are then relinquished to them. Now, time instruments are commonly used in scenarios where parties anticipate some sort of delay between the agreement and the actual fulfillment of the payment.

These include loans, which have some sort of scheduled repayment structure. Now, time instruments have a little bit more risk because there is always the possibility of non-payment at the agreed upon time. So the security lies in the commitment of the issuer to fulfill that obligation. Now, in terms of transferability, though, time instruments can be transferred before the maturity date providing a certain level of negotiability that allows for some flexibility.

Now that we've explored some of the nuances of time instruments, let's talk about demand instruments. Now, in contrast, a demand instruments or a demand instrument is payable immediately upon presentation to the draw E. So the holder can demand payment at any point in time. Now, the benefit of this is it provides immediate liquidity allowing for a swift and on the spot transaction since a party can simply produce the particular instrument and then of course receive payment.

Now, checks are a great example of demand instruments where the pay E can present the instrument for payment whenever needed. So if you have a check, you can of course take it to your bank and then immediately get access to those funds. Demand instruments are ideal for transactions requiring instant payment. So thus enhancing the efficiency of everyday commercial dealings.

Whereas time instruments there, of course, is a little bit of a delay in terms of when you get access to those funds. Now, from a risk and security standpoint, demand instruments have reduced risk. Now, in terms of risk and security, demand instruments like checks, for example, have a reduced risk of the delayed payment because payment is very, very quick, but can involve the risk of insufficient funds or a dishonor if presented at the wrong time. So if you were to take that same check to your local bank and the issue or did not have the funds in their bank account to thus provide to you, then obviously there's a little bit more risk there.

And lastly, demand instruments are easily negotiable and they're often passed from one party to another for various transactions. So now that we know a little about some of the nuances between time and demand instruments, let's get into the four types of negotiable instruments that I mentioned at the beginning of the video. So the first one that we're going to discuss are what we call checks. Now, a check which used to be very common, not as much anymore with electronic payments is a written unconditional order issued by an account holder instructing a bank to pay a specified amount to a designated payee.

And so the amount is specific and who this is going towards is also designated. An example of this is when you write a check to maybe your property management company or landlord for rent, you are creating a negotiable instrument, the check itself, which is of course can be transferred to others through some sort of endorsement. Next up, we have promissory notes. Now, a promissory note is a written promise from one party, which is the maker, to pay a specified sum of money to another party or the payee at a predetermined time or on demand.

An example of a promissory note could be a student that's taking out a loan and signing a promissory note to repay the borrowed amount. This creates a negotiable instrument that may be transferred to another party. The third type of negotiable instrument we're going to talk about are what are known as drafts. Now, a draft comes in two varieties.

There are time and demand drafts. Now, a time draft specifies a future date of payment while a demand draft is payable immediately upon presentation to the dry. So very similar to our discussion before. For instance, a time draft might be used in international trade, allowing time for goods to reach their destination before payment is made.

And on the other hand, a demand draft could be used for more immediate transactions. Now, lastly, we have certificates of deposit or CDs. Now, a CD is a time instrument that's issued by a bank, representing a deposit with a specified maturity and interest rate. Investors often purchase CDs as secure investment because they are backed by the FDIC.

And unlike checks, promissory notes and drafts, which involve orders or promises to pay, CDs are more akin to time deposits with fixed terms. So you can go to your local bank or credit union and you can get a certificate of deposit for three months, six months, nine months, one year, multiple years. And as a result of that, you are compensated for not having access to your funds for that period of time. But once the CD matures, you have access to all of your investment.

And then over the course of these certificates of deposit, you receive interest associated with not having access to your funds. Now, as we wrap up this video, I want to mention that negotiable instruments really play a critical role in commercial transactions, giving us flexibility and some security with regards to financial dealings. And understanding the different types provides a really good foundation for navigating some of the complexities of commercial law and ensuring a very smooth flow of economic activity. Thanks for watching this video.

I hope you enjoyed it and we'll see you next time.