Payment Instruments and Checks
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Questions and Answers

What are the two types of acceptability for payments?

  • Unlimited acceptability and limited acceptability (correct)
  • Unlimited acceptability and conditional acceptability
  • Conditional acceptability and restricted acceptability
  • Conditional acceptability and limited acceptability

Which of the following is a type of order to pay?

  • Promise to pay
  • Check
  • Draft
  • All of the above (correct)

What is the difference between a bearer check and an order check?

  • An order check is payable to a specific person, while a bearer check is payable to anyone. (correct)
  • An order check has a signature, while a bearer check does not.
  • A bearer check has a signature, while an order check does not.
  • A bearer check is payable to a specific person, while an order check can be paid to anyone.

What is a post-dated check?

<p>A check that is dated for a future date. (A)</p> Signup and view all the answers

What is the main difference between a bank draft and a commercial draft?

<p>A bank draft is issued by a bank, while a commercial draft is issued by a business firm.</p> Signup and view all the answers

What is the difference between a revocable and an irrevocable commercial letter of credit?

<p>A revocable letter of credit can be canceled by the issuing bank without prior notice, while an irrevocable letter of credit cannot. (C)</p> Signup and view all the answers

Which of the following is NOT a type of commercial letter of credit based on transmission?

<p>Confirmed (B)</p> Signup and view all the answers

A bank draft can be used to pay a third person a specific sum of money.

<p>True (A)</p> Signup and view all the answers

A stale check is a check that is more than 6 months old.

<p>True (A)</p> Signup and view all the answers

Match the following banking terms with their descriptions:

<p>Maker = The person who promises to pay Payee = The person who will receive payment Drawer = The person who issues the check or draft Drawee = The person who is ordered to make the payment Beneficiary = The person who will receive the money from a letter of credit</p> Signup and view all the answers

Flashcards

Unlimited Acceptability

An obligation that is accepted without question, regardless of the issuer.

Limited Acceptability

An obligation whose acceptance depends on the creditworthiness of the issuer.

Order to Pay

A written command from one party (drawer) to a second party (drawee) to pay a specific sum of money to a third party (payee).

Promise to Pay

A written promise from one party (maker) to pay a specific sum of money to another party (payee) at a future time.

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Drawer

The person who issues an order to pay.

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Drawee

The person or institution who is ordered to make a payment.

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Payee

The person who is to receive the payment.

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Check

A negotiable instrument that orders a bank to pay a specified sum of money to the payee.

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Order Check

A check payable to the person named on it.

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Bearer Check

A check payable to anyone who presents it, with no restrictions.

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Crossed Check

A check that has two parallel lines drawn across its face, limiting its use to bank deposit only.

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Certified Check

A check that has been guaranteed by a bank.

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Manager's Check

A check issued by a bank and signed by its manager or cashier.

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Post-Dated Check

A check with a future date that cannot be cashed before that date.

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Stale Check

A check more than six months old.

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Traveler's Check

A check that can be cashed anywhere in the world.

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Counter Check

A check issued by a bank to allow account holders to withdraw funds when their regular checkbook is empty.

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Bouncing Check

A check that bounces due to insufficient funds.

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Bank "on us" Check

A check drawn on a specific bank branch in a particular locality.

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Local Clearing Check

A check that can be cleared through banks in the same locality.

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Regional Clearing Check

A check that can be cleared through banks in different provinces.

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Bank Money Order

A check issued to a beneficiary to pay a specific sum of money, drawn on a specific bank.

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Postal Money Order

A check issued by a post office to pay a beneficiary, payable at another post office.

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Bank Draft

A check drawn by one bank on another bank to pay a third party.

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Commercial Draft

A check drawn by a seller on the buyer or a business firm to pay a specified sum.

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Demand Draft

A draft payable on demand, immediately upon presentation.

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Time Draft

A draft with a specified future date for payment.

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Trade Acceptance

A written order from a seller to the buyer to pay a certain sum.

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Banker's Acceptance

A draft that has been accepted by a bank.

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Commercial Letter of Credit

A written promise from a bank to honor drafts drawn against a buyer's account.

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Buyer

The buyer who initiates the opening of a letter of credit.

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Seller

The seller who receives the letter of credit.

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Opening Bank

The bank that notifies the beneficiary about the letter of credit.

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Negotiating Bank

The bank that makes the payment under the letter of credit.

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Circular Letter of Credit

A letter of credit issued by the opening bank to various individuals or corporations.

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Specially Advised Letter of Credit

A letter of credit issued by the opening bank and delivered to the beneficiary through a notifying bank.

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Revocable Letter of Credit

A letter of credit that can be cancelled by the bank without notice.

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Irrevocable Letter of Credit

A letter of credit that cannot be cancelled by the bank without the beneficiary's consent.

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Confirmed Letter of Credit

A letter of credit where the negotiating bank acts as a guarantor for the opening bank, providing double protection to the exporter.

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Unconfirmed Letter of Credit

A letter of credit where the negotiating bank acts only as the advising or paying agent for the opening bank.

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Study Notes

Acceptability of Payment Instruments

  • Unlimited acceptability - payment from one party to another without question about the source
  • Limited acceptability - acceptance depends on the issuing party's creditworthiness

Order to Pay

  • Order to pay - a person directs another to pay a third party a specified amount
  • Promise to pay - a person promises to pay another a definite sum at a later date

Parties Involved in an Order to Pay

  • Drawer - the person giving the order
  • Drawee - the person ordered to make the payment
  • Payee - the person receiving the payment

Types of Checks

  • Order check - payable only to a specified person
  • Bearer check - payable to whomever holds it
  • Crossed check - not cashable directly but deposited in a bank account
  • Certified check - certified by the bank, guaranteeing payment
  • Manager's check - payable to a specific person, signed by bank manager
  • Post-dated check - not payable before the date written on it
  • Stale check - a check over six months old

Other Payment Instruments

  • Traveler's check - payable anywhere in the world
  • Counter check - used as a method of withdrawing cash from a bank account
  • Bouncing check - a check for which the drawer's account doesn't have enough funds
  • Bank checks (on us/local/regional/Manila) - checks from one bank branch to another within a city/region/country

Drafts

  • Drafts are orders from drawer (with nominal fees) to a drawee to pay a third party
  • Money order (bank/postal) - a payment order from one party to another (either in the same or different bank) to pay a third party a specified sum of money
  • Bank Draft - An order of one bank to another bank to pay a specific third party a definite amount of money
  • Commercial Draft - drawn by a seller on a buyer to acquire a certain sum of money
  • Demand Draft - draft which is payable at sight
  • Time Draft - payable at a specific future date

Promissory Notes

  • Promissory note - a written promise by a maker to pay the payee a specific sum on demand or at a future date
  • Maker - the person promising to pay
  • Payee - the person to receive payment

Commercial Letters of Credit

  • Commercial letter of credit - a written promise from a bank to honor drafts drawn from a seller.
  • Parties involved:
    • Buyer/importer
    • Seller/exporter
    • Opening bank
    • Negotiating bank
  • Types:
    • Circular
    • Specially advised
    • Revocable
    • Irrevocable

Confirmed vs. Unconfirmed Letters of Credit

  • Confirmed - exporter enjoys the protection of two banks
  • Unconfirmed - only acts as advising or paying agent for the issuing bank

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Related Documents

Financial Instruments: Checks, Drafts and Promissory Notes PDF

Description

This quiz covers essential concepts regarding payment instruments, including their acceptability and the roles of different parties in an order to pay. Understand the various types of checks and the implications of each for transactions. Test your knowledge and grasp the key terms associated with financial instruments.

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