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In: Accounting

Explain the requirement for a fixed amount in negotiable​ instruments?

Explain the requirement for a fixed amount in negotiable​ instruments?

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Expert Solution

What Is a Negotiable Instrument?

A negotiable instrument is a signed document that promises a sum of payment to a specified person or the assignee.

Thus the paper meets the following criteria:

  1. It must be in writing.
  2. It must be signed by the maker or drawer.
  3. It must be an unconditional promise or order to pay.
  4. It must be for a fixed amount in money.
  5. It must be payable on demand or at a definite time.
  6. It must be payable to order or bearer, unless it is a check.

Requirement for fixed amount in a negotiable instrument.

The instrument must recite an exact amount of money that is to be paid, although the exact amount need not be expressed in a single figure. For example, the note can state that the principal is $1,000 and the interest is 11.5 percent, without specifying the total amount. Or the note could state the amount in installments: twelve equal installments of $88.25. Or it could state different interest rates before and after a certain date or depending on whether or not the maker has defaulted; it could be determinable by a formula or by reference to a source described in the instrument.Uniform Commercial Code, Section 3-112(b). It could permit the maker to take a discount if he pays before a certain date or could assess a penalty if he pays after the date. It could also provide for an attorney’s fees and the costs of collection on default. If it is clear that interest is to be included but no interest amount is set, UCC Section 3-112 provides that it is “payable at the judgment rate in effect at the place of payment of the instrument and at the time interest first accrues.” The fundamental rule is that for any time of payment, the holder must be able to determine, after the appropriate calculations, the amount then payable. See Section 19.4 "Cases", Centerre Bank of Branson v. Campbell, for a case involving the “fixed amount” rule.


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