Deck 19: Definition, Creation, and Categories of Negotiable Instruments

Question 1

A negotiable instrument must be in writing.

Answer 1

True

Question 2

A negotiable instrument is a conditional promise or order.

Answer 2

False

Question 3

If an instrument is classified as a negotiable instrument, it can be readily exchanged or sold to third parties for free.

Answer 3

False

Question 4

A check is a written order to pay money signed by the person giving the order.

Question 5

A certificate of deposit is a written note that indicates a bank has received money as a loan and promises to repay the amount in the future with interest, typically at a higher rate than that offered by a savings account.

Question 6

Mediations are the various steps used to transfer a negotiable instrument from party to party through a legally defined process.

Question 7

An indorsement is a signature, other than that of a signer as maker, drawer or acceptor of the instrument, for the purpose of negotiating the instrument.

Question 8

Negotiable instruments play a minor role in finance.

Question 9

The process of packaging promissory notes and negotiating their sale to investors is called securitization.

Question 10

A negotiable instrument:

A) requires a fixed amount of money
B) must be in writing
C) is payable on demand or in the future
D) All of the choices are correct.

Question 11

A negotiable instrument(s) is/are payable:

A) "to order"
B) "to bearer"
C) "to cash"
D) All of the choices are correct.

Question 12

A negotiable instrument is made payable:

A) either on demand or at a definite time in the future
B) without recourse
C) in perpetuity
D) None of the choices are correct.

Question 13

If the instrument is classified as a negotiable instrument, it can be readily exchanged or sold to third parties for __________.

A) value
B) free
C) at will
D) None of the choices are correct.

Question 14

Negotiable instruments serve two vital commercial purposes:

A) an express warranty and personal services
B) an express and an implied warranty
C) a substitute for money and an implied warranty of fitness for a particular purpose
D) a substitute for money and financing

Question 15

Selling a loan that is a negotiable instrument, such as a promissory note, offers:

A) liquidity
B) encourages lending
C) provides an investment opportunity for the purchaser
D) All of the choices are correct.

Question 16

The UCC defines a __________ as a written undertaking to pay money signed by the party undertaking to pay:

A) offer
B) promise
C) common law contract
D) gift

Question 17

A negotiable instrument can be an unconditional promise to repay or it can be __________.

A) merchantable
B) express
C) puffery
D) an order

Question 18

__________ currency is acceptable as a basis for creating a negotiable instrument:

A) Implied
B) Express
C) Foreign
D) Secondary

Question 19

Jenny owes Jamie $100 to repay a short-term loan they agreed to one evening at a restaurant. They signed this agreement on a bar napkin. Jamie owes Johnny $100 for babysitting services. Jamie can order Jenny to pay Johnny because it is

A) an implied warranty
B) an express warranty
C) a negotiable instrument
D) a warranty of fitness for a particular purpose

Question 20

To be payable on demand, an instrument must either state that it is payable on demand or __________ the date altogether.

A) imply
B) omit
C) include
D) None of the choices are correct.

Question 21

In Smith v. Vaughn, 174 Ohio App. 3d 473, the court held that the phrase to pay "when you can" created:

A) an implied warranty
B) a negotiable instrument
C) a promissory note
D) All of the choices are correct.

Question 22

An __________ can be classified as a draft or a check.

A) order
B) demand
C) delegation
D) warranty

Question 23

A __________ is simply a written order to pay money signed by the person giving the order.

A) warranty
B) contract
C) assurance
D) draft

Question 24

A draft involves three parties:

A) a payor, a drawee, and a payee
B) a drawer, a drawee, and a payee
C) a drawee, a payee, and a third party
D) None of the choices are correct.

Question 25

A draft may be either a time draft, which is payable at a determined future date, or a __________ draft, which is payable at any time upon demand once it is presented to the drawee.

A) sight
B) retracted
C) false
D) free

Question 26

A __________ is a specialized type of order and draft payable on demand and drawn on a bank.

A) warranty of title
B) check
C) promise
D) future promise

Question 27

A __________ is any type of loan whereby one party offers to lend a specific amount of money with repayment in the future.

A) warranty
B) offer
C) promissory note
D) None of the choices are correct.

Question 28

A promissory note creates a promise to repay involving two parties: __________.

A) the first party and the second party
B) the maker and the payee
C) the maker and the makee
D) None of the choices are correct.

Question 29

A __________ is the various steps used to transfer a negotiable instrument from party to party through a legally defined process.

A) negotiation
B) arbitration
C) mediation
D) None of the choices are correct.

Question 30

If an instrument is __________ and thus payable to an identified person, its negotiation requires that the identified party physically transfer the instrument and indorse the instrument to its new holder.

A) implied paper
B) bearer paper
C) order paper
D) All of the choices are correct.

Question 31

An __________ is a signature, other than that of a signer as maker, drawer or acceptor of the instrument, for the purpose of negotiating the instrument.

A) implied warranty
B) indorsement
C) implication
D) All of the choices are correct.

Question 32

In Danco, Inc. v. Commerce Bank/Shore, 675 A.2d 663 (N.J. Super. Ct. App. Div. 1996), the court held that:

A) the indorsements of Danco were not required on the checks in question
B) the promises of Danco were not required on the checks in question
C) the indorsements of Commerce Bank were not required on the checks in question
D) the promises of Commerce Bank were not required on the checks in question

Question 33

A __________ consists solely of the indorser's signature and nothing else.

A) special indorsement
B) blank indorsement
C) fixed indorsement
D) None of the choices are correct.

Question 34

A __________ specifically identifies the party to whom the instrument is to be payable.

A) special indorsement
B) blank indorsement
C) fixed indorsement
D) None of the choices are correct.

Question 35

A __________ is one that seeks to limit the negotiability of an instrument or impose a condition on the payee.

A) non-restrictive indorsement
B) horizontal indorsement
C) lateral indorsement
D) restrictive indorsement

Question 36

A __________ lacks any type of language that seeks to limit the negotiability of an instrument or conditions to its payment or transfer.

A) non-restrictive indorsement
B) horizontal indorsement
C) lateral indorsement
D) restrictive indorsement

Question 37

A __________ adds language such as "Without recourse" to limit the indorser's loss exposure due to nonpayment.

A) non-restrictive indorsement
B) qualified indorsement
C) lateral indorsement
D) unqualified indorsement

Question 38

An unqualified indorsement does not include any language that __________ the indorser's nonpayment liability.

A) frees
B) perpetuates
C) limits
D) All of the choices are correct.

Question 39

Vehicle purchase agreements are examples of:

A) financing
B) promissory notes
C) negotiable instruments
D) All of the choices are correct.

Question 40

The __________ packages thousands of auto loans and sells them to a separate corporation, called a special purpose vehicle (SPV), which is created specifically to own these notes.

A) implied seller
B) merchant
C) financing company
D) warranty buyer

Question 41

The process of packaging promissory notes and negotiating their sale to investors is called __________.

A) guarantor
B) seller
C) securitization
D) None of the choices are correct.

Question 42

Various types of __________ undergo securitization.

A) debts
B) warranties
C) documents
D) contracts

Question 43

Name and describe the elements of a negotiable instrument.

Question 44

James issues a signed written promise that states, "I promise to pay Irvin $20,000 if he sells me his Jeep before March 29." Does this qualify as a negotiable instrument? Why or why not?

Question 45

Sally promised to pay Samuel via a written document which stated "I promise to pay Samuel Williams $5000 on July 29, 2020." What type of negotiable instrument was created? Why?

Question 46

Brian owes Frederick $500 for a past debt owed. Ethan owes Brian $500 for a down payment on a vehicle. Ethan writes on the back of the promissory note: "Pay to Brian," Does Brian have the ability to present the note to Frederick for payment?

Question 47

Describe in detail the process of securitization for a special purpose vehicle (SPV).