Question 1

To be negotiated,bearer paper must simply be delivered.

Accepted Answer

Negotiable instruments such as bearer paper do not require endorsement or transfer of ownership. They can be negotiated simply by delivery from one person to another.

Question 2

Commercial paper is a contract to pay money.

Accepted Answer

Commercial paper is a type of short-term debt instrument that is issued by corporations with a high credit rating. It is essentially a promissory note or IOU that the issuer (borrower) agrees to pay back with interest to the investor (lender) on a specified date in the future. Therefore, commercial paper is a contract to pay money.

Question 3

In the Rosenbaum v.Bulow,the court ruled that Bulow neither gave value for the promissory note nor acted in good faith.

Accepted Answer

False

Question 4

The term "issuer":
A)is not used in relation to commercial paper.
B)is an all-purpose term that means both maker and drawer.
C)is synonymous with drawee.
D)is used in relation to commercial paper only to indicate the bank which creates a certificate of deposit.

Accepted Answer

The term "issuer" is an all-purpose term that can refer to both the maker and drawer of commercial paper. It is not synonymous with drawee, which is the party who is ordered to pay the amount stated on the instrument. While banks may issue certificates of deposit, this is not the only use of the term "issuer" in relation to commercial paper.

Question 5

Forgery is a valid defense against a holder in due course.

Accepted Answer

Forgery is a valid defense against a holder in due course because it challenges the authenticity of the instrument, making it void.

Question 6

A & D,Inc.wrote a negotiable note payable to Vicy,Inc.A & D left the amount of the note blank because it was uncertain as to amount of the applicable tax.Vicy completed the note for $3,000 more than A & D actually owed for the products it purchased.The note was negotiated to a holder in due course.A & D will not have to honor the note as this constituted fraud in the execution.

Accepted Answer

A & D will likely have to honor the note because the holder in due course is protected from certain defenses, including fraud in the inducement, but not fraud in the execution. However, leaving the amount blank and allowing Vicy to fill it in could be seen as giving Vicy the authority to complete the note, making it difficult to claim fraud in the execution.

Question 7

Sophie issues a promissory note made "payable to the order of Molly." Molly indorses the note by signing her name and gives the note to Dana.Which of the following is correct?
A)Sophie issued a bearer instrument and Molly kept it in bearer form.
B)Sophie issued an order instrument, but Molly changed it to bearer form.
C)Sophie issued an order instrument and Molly kept it in order form.
D)Sophie issued a bearer instrument and Molly changed it to bearer form.

Accepted Answer

The answer of Sophie issues a promissory note made "payable...

Question 8

Charlene has possession of a check made out to her order which she received in payment for writing a manuscript for her publisher.Charlene is a holder in due course and the publisher cannot claim any "real" defenses to payment.Charlene has an unconditional right to be paid for the check.

Accepted Answer

A holder in due course is someone who possesses a negotiable instrument (such as a check) and meets certain criteria, such as taking the instrument in good faith and for value. If Charlene meets these criteria, she would be considered a holder in due course and would have an unconditional right to be paid for the check, even if the publisher had certain defenses (such as fraud or breach of contract) against the original payee.

Question 9

Valley National Bank issued a note promising to repay an investor on October 1,2011,three years from the date of issue,plus interest.The note:
A)is a certificate of deposit, and it will pay a lower rate of interest than a regular savings account at Valley.
B)is a certificate of deposit, and it will pay a higher rate of interest than a regular savings account at Valley.
C)is a certificate of deposit, and whether the bank pays a higher or lower rate of interest than it pays on its regular savings accounts depends upon particular bank policy.
D)constitutes a trade acceptance.

Accepted Answer

The note is a certificate of deposit and typically pays a higher rate of interest than a regular savings account.

Question 10

There are three kinds of commercial paper: negotiable,non-negotiable and promissory.

Accepted Answer

Commercial paper typically refers to unsecured, short-term debt instruments issued by corporations, and it is generally negotiable. Promissory notes are a different financial instrument.

Question 11

Tim wrote a negotiable note.Subsequently,Tim's debts were discharged in bankruptcy.If a holder in due course presents the note for payment,Tim does not have to pay.

Accepted Answer

The answer of Tim wrote a negotiable note.Subsequently,Tim's debts were...

Question 12

With non-negotiable commercial paper,a transferee's rights are conditional.

Accepted Answer

With non-negotiable commercial paper, the transferee's rights are conditional and subject to any defenses or claims that could be raised against the transferor.

Question 13

A possessor of non-negotiable paper has the same rights as the person who made the original contract.

Accepted Answer

The answer of A possessor of non-negotiable paper has the...

Question 14

Commercial paper is only used as a substitute for money.

Accepted Answer

While commercial paper can be used in some cases as a substitute for money, it is primarily used as a short-term borrowing instrument for corporations and other large entities.

Question 15

Francenie has a checking account at Corner Bank.She wants tickets to an upcoming concert.She writes a check to Ticketmaster for the cost of two tickets.In this scenario:
A)Francenie is the drawee, Corner Bank is the drawer, and Ticketmaster is the payee.
B)Francenie is the maker, Corner Bank is the drawee, and Ticketmaster is the payee.
C)Francenie is the drawer, Corner Bank is the drawee, and Ticketmaster is the payee.
D)Francenie is the payee, Corner Bank is the drawer, and Ticketmaster is the maker.

Accepted Answer

Francenie is the one writing the check, so she is the drawer. Corner Bank is the institution that holds her funds and processes the transaction, so they are the drawee. Ticketmaster is the intended recipient of the funds, so they are the payee. Therefore, the correct option is C.

Question 16

Personal and real defenses are valid against an ordinary holder,only real defenses can be used against a holder in due course.

Accepted Answer

Personal defenses, such as breach of contract or fraud, can be used against an ordinary holder, but not against a holder in due course who is protected by certain presumptions under the law. Real defenses, such as forgery or lack of consideration, can be used against both an ordinary holder and a holder in due course.

Question 17

A check is the most common form of a draft.

Accepted Answer

A check is a type of draft that is commonly used for making payments or transferring funds.

Question 18

Trisha loaned Brian $600 evidenced by a promissory note.When Brian paid off the loan,he did not ask Trisha for the note.She sold it to Carin,a holder in due course.Brian does not have to pay Carin since he already paid Trisha the full $600.

Accepted Answer

Even though Brian paid off the loan to Trisha, since Carin is a holder in due course of the promissory note, Brian may still be obligated to pay Carin. Carin's rights as a holder in due course are separate from Trisha's rights to collect on the loan. Therefore, Brian cannot use the fact that he paid Trisha as a defense against Carin's claim to the debt.

Question 19

Handy Hardware purchases 1200 metallic hooks from Heavy Metals for $1.25 each.Handy promises to pay the money in three months.Heavy Metals wants the money now,as well as keeping Handy as a customer.Heavy Metals (as drawer)drafts an instrument ordering Handy (as drawee)to pay $1500 to First Bank (the payee).This instrument is:
A)a check.
B)a promissory note.
C)a trade acceptance.
D)a payable on demand note.

Accepted Answer

The instrument described is a trade acceptance. It is a type of draft, similar to a check, but used specifically in commercial transactions where a seller (in this case, Heavy Metals) wants to ensure they will receive payment at a later date. By drafting the trade acceptance, Heavy Metals can receive payment immediately from First Bank, while also securing payment from Handy at a future date. This instrument is commonly used in situations where a seller wants to extend credit to a buyer without assuming all the risk of non-payment.

Question 20

Margo is in possession of a check issued to her by Felix.The check states,"Pay to the order of Margo." If Margo wishes to transfer the check to Pete to pay a debt she owes him,all she needs to do is indorse the back of the check and give it to him.

Accepted Answer

Margo can transfer the check to Pete by indorsing the back of the check and giving it to him. This would make Pete the new holder of the check and he can deposit or cash it.

Quiz 22: Creating a Negotiable Instrument