Deck 22: Creation of Negotiable Instruments

Question 1

A ________ is a two-party negotiable instrument that is an unconditional written pledge by one party to pay money to another party.

A) bill of exchange
B) check
C) certificate of deposit
D) promissory note

Answer 1

D

Question 2

________ are special forms of contracts that satisfy the requirements established by Article 3 of the Uniform Commercial Code (UCC).

A) Banknotes
B) Negotiable instruments
C) Letters of credit
D) Stocks

Answer 2

B

Question 3

Article 3 of the Uniform Commercial Code (UCC) governs the use of negotiable instruments.

Answer 3

True

Question 4

Who is the drawee of a check?

A) the drawer of the check
B) the financial institute where the drawer has an account
C) the party to whom a check is written
D) the financee to whom the check is drawn

Question 5

Negotiable instruments help in creating a credit economy.

Question 6

The creation of a negotiable instrument is known as negotiation.

Question 7

List and briefly explain the functions of a negotiable instrument.

Question 8

A ________ is a type of draft that is always paid at a future date.

A) sight draft
B) bill of exchange
C) time draft
D) demand draft

Question 9

Which of the following is a characteristic of a check?

A) It always draws its money from a financial institute.
B) It is created when credit is extended to a buyer by a seller.
C) It is a two-party instrument.
D) It is an unconditional written promise to pay.

Question 10

A sight draft that arises when a seller extends credit to a buyer with the sale of goods is known as a ________.

A) check
B) time draft
C) trade acceptance
D) demand draft

Question 11

Which of the following is true of a trade acceptance?

A) The buyer is the payee.
B) The seller is both the drawer and payee.
C) The draft is countersigned by the drawee's bank.
D) The draft is only as good as the drawer's creditworthiness.

Question 12

A ________ is a distinct form of draft drawn on a financial institution and payable on demand.

A) promissory note
B) check
C) deed
D) letter of credit

Question 13

Which of the following is a similarity between a demand draft and a trade acceptance?

A) both are examples of sight drafts
B) both require credit to be extended to the buyer
C) both have the drawer to be the payee as well
D) both are considered two-party transactions

Question 14

Who is the acceptor of a draft in a draft transaction?

A) the drawer
B) the drawee
C) the payee
D) the financee

Question 15

________ of the Uniform Commercial Code (UCC) is a model code that establishes rules for the creation of, transfer of, enforcement of, and liability on negotiable instruments.

A) Article 5
B) Article 3
C) Article 2
D) Article 2A

Question 16

Which of the following is true of a draft?

A) It is always a two-party transaction.
B) It is an unconditional written promise to pay.
C) It is a note created upon deposition of money.
D) It is a written order by one party that orders a second party to pay a third party.

Question 17

A ________ is a three-party instrument that is an unconditional written order by one party that orders a second party to pay money to a third party.

A) draft
B) promissory note
C) certificate of deposit
D) lease

Question 18

The primary benefit of a negotiable instrument is that it can be used as a substitute for money.

Question 19

Which one of the following is a three-party instrument?

A) a promissory note
B) a certificate of deposit
C) an ordinary lease
D) a draft

Question 20

In a draft transaction, the drawee is the party who ________.

A) demands the draft
B) pays the money stated in a draft
C) writes an order for a draft
D) receives the money from a draft

Question 21

A trade acceptance is legally a two-party transaction.

Question 22

Which of the following must a promissory note contain to make it negotiable?

A) an acknowledgement of debt
B) an implied promise to pay
C) an unconditional promise to pay
D) a promise to negotiate

Question 23

A promissory note is a two-party transaction.

Question 24

The financial institution upon which a check is written is the payee of a check.

Question 25

Which of the following is true of a promissory note?

A) It is a three-party instrument.
B) It is not an order to pay.
C) The party who makes the promise is the lender.
D) The payee cannot transfer a note to a third party.

Question 26

A bill of exchange is a type of sight draft.

Question 27

A two-party negotiable instrument that is a special form of note created when a person deposits money at a financial institution in exchange for the institution's promise to pay back the amount of the deposit plus an agreed-on rate of interest upon the expiration of a set time period agreed upon by the parties is known as a ________.

A) collateral note
B) check
C) certificate of deposit
D) bill of exchange

Question 28

A promise or order is only considered negotiable if ________.

A) the promise or order to pay is unconditional
B) it states that the promise or order is subject to or governed by another writing
C) the rights to the promise or order are stated in another writing
D) an express condition to payment is mentioned

Question 29

Mike deposited $100,000 in a bank and procured a certificate of deposit on it, payable to himself, for repayment in five years with a five percent interest rate. A year after that, Mike borrowed $25,000 from Jill, and gave her a promissory note to repay it in one year. As collateral, Mike gave Jill the certificate of deposit and asked to put in a prepayment clause, to which Jill agreed. They agreed that Mike could repay in monthly payments, as mentioned in the note. If Mike defaults on the payment even after one year, which of the following is true of the foreclosure options Jill has with the certificate of deposit Mike gave her?

A) The bank has to pay her only after the five-year period mentioned in the CD.
B) The bank does not have to pay her for the CD.
C) The bank has to pay her the difference of $75,000.
D) The bank has to pay her $25,000 with one year interest of 5 percent on demand.

Question 30

If a promissory note is secured by a piece of real estate, then the note is called a(n) ________.

A) collateral note
B) mortgage note
C) demand note
D) installment note

Question 31

Mike deposited $100,000 in a bank and procured a certificate of deposit on it, payable to himself, for repayment in five years with a five percent interest rate. A year after that, Mike borrowed $25,000 from Jill, and gave her a promissory note to repay it in one year. As collateral, Mike gave Jill the certificate of deposit and asked to put in a prepayment clause, to which Jill agreed. They agreed that Mike could repay in monthly payments, as mentioned in the note. What kind of promissory note have Jill and Mike decided on?

A) a time note
B) a bearer's note
C) a mortgage note
D) an installment note

Question 32

Which of the following is true of a certificate of deposit?

A) It is a promise to pay.
B) It is used to extend credit to a buyer.
C) It is a three-party instrument.
D) It can be made to pay on demand.

Question 33

Roger, a lawyer, borrowed money from Jax to start a business. He gave a promissory note to Jax promising to pay the money back anytime within the next five years. But in order to accept the note, Jax demanded a security deposit. Roger gave the gold that he owned as security. Roger in turn demanded that a specific clause be added to the promissory note to allow faster repayment of the loan in case he inherited money within the next five years. But even after five years, Roger was unable to complete payment. He made a new promissory note promising to finish payment within the next year, and promised to provide free legal service to Jax for the next two years. What kind of promissory note did Jax secure from Roger for the original amount?

A) a collateral note
B) a mortgage note
C) an installment note
D) a time note

Question 34

In a draft transaction, the payee is called the acceptor of the draft.

Question 35

In a draft transaction, the payee or the drawer is allowed to freely transfer drafts as a negotiable instrument to another party.

Question 36

A ________ is an exception in promissory notes, as it does not require the maker's unconditional and affirmative promise to pay.

A) trade acceptance
B) collateral note
C) remittance advice
D) certificate of deposit

Question 37

A check is a type of promissory note.

Question 38

Mike deposited $100,000 in a bank and procured a certificate of deposit on it, payable to himself, for repayment in five years with a five percent interest rate. A year after that, Mike borrowed $25,000 from Jill, and gave her a promissory note to repay it in one year. As collateral, Mike gave Jill the certificate of deposit and asked to put in a prepayment clause, to which Jill agreed. They agreed that Mike could repay in monthly payments, as mentioned in the note. In which of the following ways will the prepayment clause help Jill?

A) It helps Jill to shorten the repayment period when she wishes.
B) It helps Jill acquire the whole amount in one payment in case Mike defaults.
C) It allows Mike to repay earlier than the stipulated time.
D) It obligates Mike to pay interest on the money he defaults.

Question 39

Roger, a lawyer, borrowed money from Jax to start a business. He gave a promissory note to Jax promising to pay the money back anytime within the next five years. But in order to accept the note, Jax demanded a security deposit. Roger gave the gold that he owned as security. Roger in turn demanded that a specific clause be added to the promissory note to allow faster repayment of the loan in case he inherited money within the next five years. But even after five years, Roger was unable to complete payment. He made a new promissory note promising to finish payment within the next year, and promised to provide free legal service to Jax for the next two years. Which of the following clause did Roger ask to add in the first promissory note?

A) a prepayment clause
B) an acceleration clause
C) an extension clause
D) a forestallment clause

Question 40

Acceptance of drafts can be done orally.

Question 41

Security posted by a promissory note maker to the lender for repayment of money is known as collateral.

Question 42

A promissory note is a two-party instrument.

Question 43

The Uniform Commercial Code (UCC) signature requirement indicates that a negotiable instrument must be signed by ________.

A) a witness
B) the maker or drawer
C) the drawee
D) the financee

Question 44

The Uniform Commercial Code (UCC) signature requirement indicates that a negotiable instrument must be signed by the drawer if it is a certificate of deposit.

Question 45

A negotiable instrument must be in writing in order to be considered valid.

Question 46

Once an appointed authorized representative signs a negotiable instrument, while unambiguously disclosing his or her agency status, and the identity of the maker or drawer, then ________.

A) the authorized agent becomes personally liable to pay for the negotiable instrument
B) the signature binds the maker or drawer of the negotiable instrument to the instrument
C) the agent cannot sign another negotiable instrument until this instrument's transaction is complete
D) the agent is obligated with secondary liability to the instrument

Question 47

If the payee of the instrument is not mentioned on the face of the instrument, it is not a negotiable instrument.

Question 48

A fundamental requirement for a negotiable instrument is that it must ________.

A) be supplemented with interest upon payment
B) be secured with collateral
C) contain a drawer, drawee, and a payee
D) be in a permanent state

Question 49

A(n) ________ is type of instrument that is payable to anyone in physical possession of the instrument and presents it for payment when it is due.

A) certificate of deposit
B) order instrument
C) bearer instrument
D) check

Question 50

Which of the following statements is true of a negotiable instrument?

A) It should be signed by the payee.
B) It need not state a fixed amount of money.
C) It should not require any undertaking other than the payment of money.
D) It can be either written or oral.

Question 51

In order to be considered valid, a negotiable instrument need not state a fixed amount of money.

Question 52

In a certificate of deposit, the depositor is the payee.

Question 53

Rubber-stamps are not recognized as signing instruments under the Uniform Commercial Code (UCC).

Question 54

Which of the following is true of a bearer paper?

A) It will mention a specific person as payee.
B) It will not specify a payee.
C) It will contain the term "payable to the order of."
D) It will contain an additional undertaking besides the payment of money.

Question 55

Promissory notes are never payable on demand.

Question 56

Roger, a lawyer, borrowed money from Jax to start a business. He gave a promissory note to Jax promising to pay the money back anytime within the next five years. But in order to accept the note, Jax demanded a security deposit. Roger gave the gold that he owned as security. Roger in turn demanded that a specific clause be added to the promissory note to allow faster repayment of the loan in case he inherited money within the next five years. But even after five years, Roger was unable to complete payment. He made a new promissory note promising to finish payment within the next year, and promised to provide free legal service to Jax for the next two years. Which of the following is true of the validity of the new promissory note made by Roger?

A) It must contain interest on the old principal to become a valid instrument.
B) It must contain a specific date or time to be considered valid.
C) It is not a negotiable instrument.
D) It is a negotiable instrument if Jax accepts it.

Question 57

Trade names or assumed names cannot be used for signing negotiable instruments.

Question 58

A certificate of deposit is an order to pay.

Question 59

The ________ requirement of negotiable instruments says that negotiable instruments must be able to be easily transported between areas.

A) portability
B) permanence
C) signature
D) transparency

Question 60

What is a trade acceptance?

Question 61

A promise or an order becomes conditional if it refers to a different writing for a description of rights to collateral, prepayment, or acceleration.

Question 62

An order instrument is payable to anyone in physical possession of the instrument and presents it for payment when it is due.

Question 63

A clause in an instrument that allows the date of maturity of the instrument to be prolonged to sometime in the future is referred to as the ________.

A) forestallment clause
B) acceleration clause
C) prepayment clause
D) extension clause

Question 64

A conditional promise is not a negotiable instrument.

Question 65

Explain the requirement for a fixed amount in negotiable instruments?

Question 66

A(n) ________ is a clause in an instrument that allows the payee or holder to speed up payment of the principal amount of the instrument, plus accrued interest, upon the occurrence of an event.

A) acceleration clause
B) prepayment clause
C) extension clause
D) forestallment clause

Question 67

To be negotiable, a draft or check must contain the drawer's unconditional order to pay a payee.

Question 68

Instruments that are payable upon an uncertain act or event are not negotiable.

Question 69

A maker or drawer can appoint an agent to sign a negotiable instrument on his or her behalf.

Question 70

A prepayment clause allows the payee or holder to accelerate payment of the principal amount of an instrument.

Question 71

Promises to pay and orders to pay must be unconditional in order to be negotiable.

Question 72

An extension clause allows the date of maturity of an instrument to be extended into the future.

Question 73

A nonnegotiable contract is rendered either nontransferable or unenforceable.

Question 74

Instruments that are payable on demand are called order instruments.

Question 75

A(n) ________ is a clause in an instrument that permits the maker to pay the amount due prior to the date of the instrument.

A) prepayment clause
B) acceleration clause
C) extension clause
D) forestallment clause

Question 76

What are nonnegotiable contracts?

Question 77

An acceleration clause permits the maker to pay the amount due prior to the due date of an instrument.

Question 78

To qualify as a negotiable instrument, a promise cannot state any other undertaking by the person promising other than the payment of money.

Question 79

An acknowledgement of debt is sufficient to consider a promissory note as a negotiable instrument.

Question 80

How does an authorized representative's signature work for negotiable instruments?