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This document presentation shows the full-fledged detailed explanation of
Negotiable Instruments and its Key concepts
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It
functions as a written contract that facilitates the transfer of rights related to
payment
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There are three primary types of negotiable instruments:
1
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It contains an unconditional promise to pay and is commonly used in various
financial transactions
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Bill of Exchange:
- This is an order in writing from one person (the drawer) to another (the
drawee) to pay a specified sum of money to a third party (the payee)
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3
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It involves three
parties: the drawer (person writing the check), the drawee (the bank), and the
payee (the person or entity receiving the payment)
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Negotiability:
The instrument can be transferred from one party to another, usually by
endorsement (signature) and delivery
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3
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• Negotiable instruments play a crucial role in commerce and finance,
providing a flexible and secure means for parties to engage in financial
transactions and facilitate the movement of funds
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Key concepts related to negotiable instruments:

Parties Involved:
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In
the case of a check, this is the person who writes the check
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Drawee:
- The party or financial institution upon whom the instrument is drawn
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3
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This could be
the holder of the instrument or someone to whom the instrument has been
endorsed
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Bearer vs
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Checks are often
order instruments
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Endorsement:
- The act of signing the back of the instrument, transferring ownership
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2
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A holder in due course has special legal
protections
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Demand Instruments:
- Payable on demand or whenever the holder requests payment
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2
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Promissory
notes and some bills of exchange fall into this category
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Bearer Instruments:
- Payable to the bearer (possessor) of the instrument
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4
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The payee must endorse it for
someone else to receive payment
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Dishonor:
- When the drawee fails to make the required payment
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2
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3
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This can occur through
payment, cancellation, or another legally recognized means
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Legal systems, including commercial codes, provide the framework
for the creation, transfer, and enforcement of negotiable instruments
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Holder in Due Course (HDC):
- A holder who meets specific legal requirements, such as acquiring the
instrument for value, in good faith, and without notice of any defects
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2
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Types of Checks:
1
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2
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The bank guarantees the
payment, making it a secure form of payment
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Traveler's Check:
- A preprinted, fixed-amount check designed for the traveler's convenience
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Defenses Against Holders:
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Examples include forgery, fraud in the execution, and infancy
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Personal Defenses:
- Defenses that are valid only against certain parties and not against holders
in due course
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Dishonor and Notice:

1
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A protest is a formal declaration of
dishonor and is often required for foreign bills of exchange
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Notice of Dishonor:
- The holder may be required to give notice of dishonor to parties liable on
the instrument
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Legal Framework:
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Understanding negotiable instruments is essential for individuals and
businesses engaged in financial transactions
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However, it's important to adhere to
legal and ethical standards to maintain the integrity of these instruments and
the financial systems in which they operate

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