What is the difference between a cheque and a demand draft?

Introduction / Context:
Cheques and demand drafts are common negotiable instruments used in banking, especially in countries with strong paper based payment traditions. Many exam questions ask candidates to distinguish between them because they involve different parties and levels of payment certainty. Knowing the difference is important for understanding how businesses choose secure methods for paying large amounts or making outstation payments.

Given Data / Assumptions:

• A cheque is issued by a customer of a bank, known as the drawer.
• A demand draft is issued by a bank itself, drawn on another branch or bank.
• Demand drafts are generally prepaid, meaning the issuing bank takes funds before issuing the instrument.

Concept / Approach:
A cheque is an order by an account holder to their bank to pay a specified sum to a named person or bearer from the account holder balance. Since it depends on the customer account having enough funds and on other conditions, a cheque may be returned unpaid. A demand draft, on the other hand, is drawn by a bank on another branch or bank, and is issued only after the customer has deposited the amount with the issuing bank. Because the bank itself is the drawer and has already collected funds, a demand draft is generally considered more secure and less likely to be dishonoured. The correct option must capture this difference in who draws the instrument and the level of payment certainty.

Step-by-Step Solution:
Step 1: Recall that a cheque involves three main parties: drawer, drawee bank and payee. Step 2: Note that the drawer of a cheque is usually an individual or business keeping an account with the bank. Step 3: Remember that a demand draft is drawn by a bank on another branch or bank after receiving funds from a customer. Step 4: Understand that payment under a cheque can fail if conditions are not met, while a demand draft is normally treated as a more secure instrument. Step 5: Select the option that clearly states these distinctions between drawer and security of payment.

Verification / Alternative check:
To verify, imagine a person writing a cheque on their current account. If there is not enough balance, the bank may return the cheque unpaid. In contrast, when a customer wants a demand draft, the bank first collects the amount and charges and then issues the draft. Because the bank has already taken money, it is now responsible for honouring the draft when it is presented at the branch on which it is drawn. This comparison confirms that the essential difference is in who draws the instrument and the resulting risk of dishonour.

Why Other Options Are Wrong:
Option B is wrong because cheques and demand drafts can both be used for domestic or, in some cases, cross border transactions depending on regulations, and are not strictly divided by geography in the way described. Option C is incorrect because neither cheques nor demand drafts inherently earn interest; interest depends on the type of account or instrument, not on the cheque or draft itself. Option D is clearly wrong because law and banking practice treat cheques and demand drafts as distinct instruments. Option E is misleading because both cheques and demand drafts are traditionally paper based, although electronic images may also be used in clearing.

Common Pitfalls:
Students sometimes confuse demand drafts with bank cheques or cashier cheques, which are similar but may have different local naming conventions. Another pitfall is forgetting that a demand draft is a prepaid instrument and therefore offers greater security to the payee. Some learners also assume that all cheques are risky, while in practice a cheque from a highly reputable company may be very reliable. Focusing on who draws the instrument and how funds are collected helps maintain a clear conceptual difference between cheques and demand drafts.

Final Answer:
A cheque is drawn by an account holder on their bank account and may be dishonoured, while a demand draft is drawn by a bank on another branch or bank and is generally prepaid and more secure.