When all the rights under a negotiable instrument are extinguished and instrument cannot be further negotiated, it is called . . . . . . . . of instrument.

The correct answer is: C. Discharge

A negotiable instrument is a document that can be transferred from one person to another by endorsement and delivery. The rights under a negotiable instrument are extinguished when the instrument is discharged. Discharge can occur in a number of ways, including payment, cancellation, or merger.

• Payment is the most common way to discharge a negotiable instrument. When the payee or holder of the instrument receives payment, the instrument is discharged and the rights of the payee or holder are extinguished.
• Cancellation is another way to discharge a negotiable instrument. Cancellation occurs when the instrument is intentionally destroyed or mutilated. Once an instrument is cancelled, it cannot be further negotiated and the rights of the parties under the instrument are extinguished.
• Merger is a third way to discharge a negotiable instrument. Merger occurs when the obligation under the instrument is merged into another obligation. For example, if a note is given in exchange for a mortgage, the note is discharged when the mortgage is paid off.

When all the rights under a negotiable instrument are extinguished and the instrument cannot be further negotiated, it is said to be discharged.