Question 1

If an instrument states, "Pay to the order of Karen Fuji or her assigns," it is payable to:

Accepted Answer

An instrument is payable to order when it states that it is payable to the order of any person with reasonable certainty. The maker or drawer may state "Pay to the order of Mary Doe," "Pay to Mary Doe or order," or "Pay to Mary Doe or her assigns."

Question 2

A ____________ check is a check drawn by one bank on another bank in which it has funds on deposit in favor of a third person, the payee.

Accepted Answer

A bank draft, sometimes called a teller's check or treasurer's check, is a check drawn by one bank on another bank in which it has funds on deposit in favor of a third person, the payee.

Question 3

Through what kind of written instrument would Tim direct Howard to pay $600 to the order of Celeste?

Accepted Answer

A draft is an instrument in which one party writes an instrument ordering a second party to pay money to a third party.

Question 4

Historically, when merchants bought goods, instead of paying for them with gold or silver, they simply filled in a piece of paper called a ____________ which ordered the goldsmith or silversmith to give a certain amount of the precious metal to the person who sold the goods.

Accepted Answer

When merchants bought goods, instead of paying for them with gold or silver, they simply filled in a piece of paper called a bill of exchange (now known as a draft). The bill of exchange ordered the goldsmith or silversmith to give a certain amount of the precious metal to the person who sold the goods.

Question 5

To accept a draft, the drawee:

Accepted Answer

To accept a draft, the drawee need only sign the draft across the face of the instrument.

Question 6

If Daphne gave value for and cashes Lisa's check, what legal rights, if any, does Daphne have?

Accepted Answer

Anyone who gives value for an instrument has the right to have the unqualified indorsement of the person who transferred it, unless it is payable to bearer.

Question 7

A check for which the issuing financial institution is both the drawer and the drawee is called a ____________.

Accepted Answer

A traveler's check is similar to a cashier's check in that the issuing financial institution is both the drawer and the drawee. The purchaser signs the checks in the presence of the issuer when they are purchased.

Question 8

An instrument containing an acknowledgment that a bank has received a sum of money and a promise by the bank to repay the sum of money is called a(n):

Accepted Answer

A certificate of deposit (CD) is an instrument containing an acknowledgment that a bank has received a sum of money and a promise by the bank to repay the sum of money.

Question 9

The words "without recourse" on an indorsement means the indorser is:

Accepted Answer

By adding the words "without recourse" to the indorsement, the indorser is not liable in the event the instrument is dishonored-that is, not paid by the maker or drawer.

Question 10

Which of the following is true of a foreign draft?

Accepted Answer

A draft that is drawn in one country, but payable in another, is called an international bill of exchange or foreign draft.

Question 11

If a bank pays a forged check, it is liable for ____________ the payee's funds.

Accepted Answer

When a bank pays proceeds to a forger and the payee's wishes are not carried out, the bank is held liable for converting the payee's funds. Conversion is the wrongful exercise of dominion and control over another's personal property.

Question 12

If a drawee refuses to pay the instrument, it is said to be:

Accepted Answer

Unless an indorsement states otherwise (e.g., by words such as without recourse), every indorser agrees to pay any subsequent holder the face amount of the instrument if it is dishonored (not paid by the maker or drawee).

Question 13

A blank indorsement should be used:

Accepted Answer

If the instrument is lost or stolen and gets into the hands of another holder, the new holder can recover its face value by delivery alone. For this reason, a blank indorsement should be used only in limited situations, such as at a bank teller's window.

Question 14

Which of the following is true of warranties by indorsers?

Accepted Answer

An indorser who receives consideration for an instrument makes five warranties to subsequent transferees of the instrument. The third warranty is that the indorser warrants there has been no alteration or other irregularity.

Question 15

Brianna repaid a $600 loan to her friend, Sharkey. She made the check payable jointly to Sharkey and Sharkey's daughter, Evie, even though she intended Sharkey to have the entire interest in the repaid debt.

Accepted Answer

When the maker or drawer of an instrument intends the payee to have no interest in the instrument or the payee is a fictitious person, an indorsement by any person in the name of the payee is effective.

Question 16

Writing the words, "pay to the order of" or "pay to", followed by name of the indorsee and the signature of the indorser on an instrument makes it a ____________ indorsement.

Accepted Answer

A special indorsement (also called an indorsement in full) is made by writing the words "pay to the order of" or "pay to", followed by the name of the person to whom it is to be transferred (the indorsee) and the signature of the indorser.

Question 17

Industries Inc. drew a check payable to "Gloria Schell and Pippen Tallit" in the sum of $20,000. For a proper negotiation, the check needs to be indorsed:

Accepted Answer

If an instrument is payable to either of two payees, as in "pay to the order of Eric Foss or Betty Foss," the indorsement of only one of the payees is necessary to negotiate it. However, if an instrument is payable to both of two payees, as in "pay to the order of Eric Foss and Betty Foss," the indorsement of both payees is necessary for a proper negotiation.

Question 18

Lillian Fey purchases a night table from Aretha Boyner. Aretha wants Lillian to pay her by check before delivering the night table to Lillian's house. Lillian decides to attach an indorsement that reads, "Pay to Aretha Boyner if she delivers her night table to me, Lillian Fey, at 16 Holmes RD." This is an example of a(n)

Accepted Answer

A conditional indorsement, a type of restrictive indorsement, purports to make the rights of the indorsee subject to the happening of a certain event or condition. A person paying the instrument or taking it for value, however, may disregard the condition.

Question 19

A check that a drawee bank guarantees will be paid to the holder is a:

Accepted Answer

A certified check is a check that is guaranteed by the bank. At the request of either the depositor or the holder, the bank acknowledges and guarantees that sufficient funds will be withheld from the drawer's account to pay the amount stated on the check.

Question 20

A check indorsed "for deposit only":

Accepted Answer

When a check is indorsed "for deposit only", the amount of the instrument is credited to the indorser's account before it is negotiated further.

Quiz 16: The Nature of Negotiable Instruments