What do you mean by negotiable instrument

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Style: MLA. Get Word of the Day daily email! Test Your Vocabulary. Can you spell these 10 commonly misspelled words? Love words? Need even more definitions? The term negotiable can be used in reference to the purchase price of a particular good or security. The asking price may not be set in stone and can be adjusted depending on the circumstance. However, when conducting financial transactions in an economy, many securities are called negotiable instruments, meaning they can be easily transferred from one party to the next, provided all proper legal documentation is included.

However, negotiable instruments, such as cash, cannot have their value modified. Negotiable can refer to a legal document or instrument used in lieu of cash, which represents a promise of payment at some point in the future. In context, the word negotiable implies a cash value and comes with specific instructions about the timing of cash flows to be paid.

The term negotiable is used to suggest the document or instrument comes with the same faith legal backing as cash under the law.

Negotiable instruments contain an unconditional promise to render payment for an exact sum, meaning the amount to be paid from the payor to the payee is stated on the instrument. The agreement also provides instructions on timing, such as on-demand or some time in the future. Some negotiable instruments must be made out to a specific person or party. Negotiable instruments can be redeemed for cash or transferred to another party.

For a piece of paper to be as good as cash or negotiable by law, it must be a written document signed by the entity drawing on the instrument—making it marketable or transferable. It must also have an explicit order or promise to pay and state a specific amount of money.

However, certain negotiable instruments do not have a date associated with them, which does not impact their negotiability. There are several types of negotiable instruments that are used in various types of financial transactions.

A check is a dated draft and orders a bank to make a specific amount payable on demand. Checks can be written by an individual or a company stipulating an amount to be paid to the payee. Checks are signed by the payor or the account owner from which the deposited money is being withdrawn to honor the check.

When a check is brought to a bank to be cashed or deposited, the money is withdrawn from the payor's bank account. A certificate of deposit CD is a negotiable instrument offered by financial institutions which pay a customer interest in exchange for depositing money in the account and holding it there for a specific time period, such as one year. A promissory note is a document in which one party promises to pay another party for a specific amount at a predetermined date in the future.

A promissory note contains similar financial details to other negotiable instruments, including the amount owed, date of issuance, interest rate, and the signature of the issuer or payor.

Promissory notes are typically used to obtain financing from a source other than a financial institution. However, promissory notes are issued by the debtor—or the person that owes the money—rather than the creditor, which is typical for most credit products.

A bill of exchange is essentially a post-dated check that does not charge any interest on the amount owed. A bill of exchange is a binding agreement in which one party is responsible for paying another party on demand at a future date.

Bills of exchange are commonly used in international trade between importers and exporters. A time draft —a type of bill of exchange—makes a demand for payment at some point in the future. A time draft is typically used in international trade and allows the buyer the importer time to pay the seller of the goods the exporter.

A sight draft is also used with international trade. However, a sight draft does not allow the importer any extra time in making a payment to the exporter.

Instead, the importer pays the sight draft as soon as the importer receives the goods shipped by the seller. The buyer accepts the draft, signs it, and returns it to the seller.

Non-negotiable means that the price of a security or terms of a contract cannot be modified. Non-negotiable can also refer to a security that cannot easily be transferred from one party to another. For example, in rental and lease agreements , the monthly amount owed by the tenant would likely be non-negotiable.

In other words, the landlord has established a fixed monthly rent or lease payment for the duration of the contract. Other contracts might only have a portion of the terms stipulated as non-negotiable. For example, an employment agreement might allow the salary to be negotiated, but the employee-conduct policy would be non-negotiable.

Conversely, negotiable means that a contract's terms can be modified, depending on the circumstances and parties involved. Certain securities are non-negotiable, as in the case of a U. Conversely, negotiable securities can be transferred, exchanged, or resold between different people, such as the case with currency. Negotiable securities are considered liquid , meaning they can easily be transferred or sold in the market. In contrast, non-negotiable instruments are considered illiquid since they cannot be resold in the market.

Before signing a contract, it's important to know which terms are negotiable and which terms are non-negotiable. A common example of a negotiable instrument is a currency, such as the U. 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. 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. 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. 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 Debt Instrument Debt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time.

Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term loans. 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 Trade Credits The term "trade credit" refers to credit provided by a supplier to a buyer of goods or services.

This makes it is possible to buy goods or services from a supplier on credit rather than paying cash up front.