2015-10-13
2570
Text 1 Types of Commercial Papers
Commercial paper is an unconditional written order or promise to pay money. The most common form of commercial paper is the personal cheque (Am. check). It was developed hundreds of years ago to serve as a safe substitute for money.
Instead of carrying their gold and silver with them, merchants left their money at the bankers. Then, when merchants wanted to pay a seller for goods they were buying, they wrote an order addressed to the bank. The order directed the bank to deliver a specified amount to the person or the place of the seller’s choice. The bank compared the merchant’s signature (and perhaps a seal) on the order with the signature left at the bank. The bank would comply with such written orders because, once the merchant had made a deposit, the bank was legally indebted to the depositor for that amount.
The same is still true today. Cheques are still known as demand instruments because they allow depositors to get their money out of banks or have it paid in accordance with the depositor’s order.
Today commercial papers can be grouped into two broad categories.
The first is composed of unconditional orders to pay money. In this category are the draft and the cheque. A cheque is a special kind of draft.
The second category is composed of unconditional promises to pay money. In this category are the promissory note and the certificate of deposit (COD).
The word unconditional means that the legal effectiveness of the order or promise is not dependent on any other event. IOU (I owe you) is not a commercial paper.
Drafts
A draft is an unconditional written order by which one party directs a second party to pay to the order of a third party or to the bearer a certain sum of money on demand or at a definite time. A draft is also known as a bill of exchange (B/O).
A draft initially involves three parties — the drawer, the drawee, and the payee. The drawer is the person who executes or draws the draft and orders that payment be made. The drawee is the person directed to pay the draft. The payee is the party to whom this commercial paper is made payable.
There are two types of drafts — a sight draft and a time draft. A sight draft is payable at sight or on demand, i.e. when it is presented to the drawee by the one holding the draft. A time draft is payable at a specified time, or at the end of a specified period after sight or after the date of the draft.
