Deck 22: Creation of Negotiable Instruments

Question 1

Negotiable instruments enable the credit economy of the United States.

Answer 1

True

Question 2

Both a note and a draft may be payable at a designated future time or on demand.

Answer 2

True

Question 3

The Revised Article 3 of the Uniform Commercial Code is called "Negotiable Instruments" rather than "Commercial Paper."

Answer 3

True

Question 4

An I.O.U.or stating I owe you $100,is another form of note that is considered to be a promise to pay.

Question 5

Negotiable instruments may not act as a substitute for money.

Question 6

A promissory note for the purchase of an automobile qualifies as a negotiable instrument.

Question 7

The essence of the fixed amount requirement is that a holder of an instrument can calculate the payment required from the face of the instrument.

Question 8

A negotiable instrument must be typewritten.

Question 9

A drawee is not liable on a draft until the drawee has accepted it.

Question 10

Negotiable instruments serve as a record-keeping device.

Question 11

The revised Article 3 of the UCC replaced the words "Commercial Paper" with "Negotiable Instruments."

Question 12

To be unconditional,a promise to pay cannot refer to another document.

Question 13

A promise to pay engraved in a mile-long steel pipe would qualify as a negotiable instrument as the promise would meet the permanency requirement.

Question 14

The signature of the drawer or maker of a negotiable instrument must be the drawer or maker's full legal name.

Question 15

A check is a form of draft that is drawn on a bank.

Question 16

Both checks and notes have makers.

Question 17

A certificate of deposit is a form of note in which the bank is the maker.

Question 18

Checks normally are three-party instruments.

Question 19

A note that requires the performance of services is negotiable so long as there is also a requirement for payment of a fixed amount of money.

Question 20

Both a sight draft and a time draft are payable on demand.

Question 21

Which of the following is true about the law governing negotiable instruments?

A) Somewhat fewer than half the states adopted the original version of Article 3 of the UCC.
B) Most negotiable instruments law is contained in federal statutes.
C) The most recent version of Article 3 of the UCC was released in 1990.
D) Negotiable instruments law comes primarily from common law.

Question 22

What characteristics are necessary for a draft to be a check?

A) It contains an indorsement in blank.
B) It is payable on demand,and the drawee is a bank.
C) It is payable at a specific time and the drawee is a bank.
D) There are no separate requirements; the requirements for a draft and a check are the same.

Question 23

Which of the following best describes a negotiable promissory note?

A) It is any promise to pay a fixed amount of money.
B) It is an unconditional promise to pay a sum of money.
C) It is a promise to pay a sum of money upon the happening of an event outside the control of the promisor.
D) It is an order to a third party to make a payment in order to discharge an obligation of the promisor.

Question 24

In order to meet the writing requirement of a negotiable instrument,the writing must:

A) be written in clear English
B) be permanent and portable
C) be prepared in duplicate
D) be typewritten rather than handwritten

Question 25

An acceleration clause allows the date of maturity of an instrument to be extended to some time in the future.

Question 26

A sight draft that arises when credit is extended with the sale of the goods is known as:

A) a time draft
B) a trade acceptance
C) a check
D) a time note

Question 27

Which of the following is true about drafts?

A) Drafts are two-party paper.
B) A draft must have a bank as the drawee.
C) A draft contains an order to pay.
D) All drafts are payable on demand.

Question 28

Where must the signature appear on a negotiable instrument in order to meet the signature requirement?

A) anywhere on the face of the instrument
B) anywhere on the face of the instrument or anywhere on the back of the instrument
C) on the face only,and only at the end of the instrument
D) at the end of the instrument on the face next to the maker or drawer's full name.

Question 29

When does the drawee become liable for payment of a draft?

A) when the drawer signs it
B) automatically upon its creation
C) upon accepting it
D) upon the performance of the underlying obligation

Question 30

Under Article 3 of the UCC,what is the effect of a note not stating a time for payment?

A) The note is void and unenforceable due to vagueness.
B) The note is considered nonnegotiable,but might nonetheless be enforceable.
C) The note is considered a time instrument with payment due at a reasonable time.
D) The note is considered a demand instrument with payment due on demand.

Question 31

An instrument that is payable "to the order of bearer" is:

A) order paper
B) bearer paper
C) nonnegotiable because of ambiguity
D) nonnegotiable because of a condition

Question 32

Which of the following is not a requirement of negotiability?

A) The instrument must be in writing.
B) The instrument must be signed by the maker or drawer.
C) The instrument must state a fixed amount of money.
D) The instrument must contain an indorsement.

Question 33

Which of the following correctly describes a certificate of deposit?

A) It is a draft that is payable by a bank.
B) It is not considered to be a negotiable instrument.
C) It is a note that is payable on demand.
D) It is a note where the maker is a bank.

Question 34

Which of the following is not one of the general purposes of negotiable instruments?

A) to operate as a substitute for money
B) to be a record-keeping device
C) to provide flexible remedies for the non-breaching party in the event of a breach
D) to facilitate the extension of credit

Question 35

A variable interest rate note is considered a negotiable instrument under the Revised Article 3 of the UCC.

Question 36

A nonnegotiable contract is unenforceable.

Question 37

All negotiable instruments can be classified into which two general categories?

A) checks and drafts
B) checks and notes
C) notes and certificates of deposit
D) notes and drafts

Question 38

Which of the following will result in an instrument being nonnegotiable?

A) It contains a variable interest rate such that the amount of interest that will be due cannot be determined at the time the note is created.
B) It states that the payment of funds will come from the proceeds of a specific contract.
C) It states that the entire balance will become immediately due in the event of a default by the maker.
D) It states that the rights of the payee to receive payment are subject to the terms of a separate agreement.

Question 39

Which of the following is not one of the four general types of negotiable instruments?

A) notes
B) drafts
C) certificates of deposit
D) money orders

Question 40

In negotiable instruments,negotiation refers to the process of reaching agreement on the terms of a negotiable instrument.

Question 41

Madolyn's father executes a promissory note stating,"I promise to pay to the order of my daughter,Madolyn,$50,000,on the date that she marries Robbie Roberts." Is the note negotiable?

A) Yes
B) No,because the date of the marriage is uncertain.
C) No,because the act of marriage is uncertain.
D) No,because neither the date nor the act are certain.

Question 42

Identify the following instrument,identify the role of each party,and identify the characteristics of the instrument.
To: Morgan Associates Date: May 7,2003
Pay to the order of Henry H.Higgins,
One thousand and 00/100 Dollars,on June 7,2003.
Mareena Kaluchi
Mareena Kaluchi

Question 43

Determine whether the following instrument is a negotiable instrument,addressing all the requirements of negotiability in your response.
"I,Orville Wright,promise to pay $5,000 to Billy's Bicycle Parts in four equal installments of principal,beginning on January 1,2004,and on the same day in each of the next 3 years.Each payment will consist of $1,250 in principal,plus interest accrued since the date of this note,in the case of the first payment,or since the prior payment in the case of all other payments.Interest shall accrue at the rate of 8% per annum,or in the event of default,at the maximum rate allowed by law until the default is cured.This note is secured by collateral consisting of various experimental flying machines.This note may be paid in whole or in part prior to the due dates,and the interest accrued will be reduced accordingly.The due date for any payment under this note may be extended by mutual agreement of the parties up to 6 months from the due date as stated herein.The proceeds of this note will be used by Orville Wright to further his aviation experiments,and in the event those experiments are unsuccessful,the payment obligation is canceled.
Signed,Orville Wright 1/1/03

Question 44

Jane owes Bob $500.Bob requests that Jane sign a document,so Jane signs the following document: "I owe Bob $500.(Signed)Jane." This document is:

A) a draft
B) a check
C) a note
D) a certificate of deposit
E) not a negotiable instrument

Question 45

If one instrument stated,"Pay to the Order of IBM," and the other stated,"Pay to IBM," which instrument would be negotiable?

A) Both would be negotiable instruments.
B) Neither would be a negotiable instrument.
C) "Pay to the Order of IBM" creates a negotiable instrument.
D) "Pay to IBM" creates a negotiable instrument.

Question 46

The law of negotiable instruments was designed to create a substitute for cash and to facilitate commerce.Has the importance of negotiable instruments in commerce increased or decreased in recent years? How will increased online commerce affect the importance of negotiable instruments?

Question 47

Sandy signs a negotiable instrument that orders Sally to pay $1,000 to the order of Pat on May 4,2001.What type of instrument is this?

A) promissory note
B) time draft
C) check
D) sight draft
E) money order

Question 48

Which of the following would qualify as a negotiable instrument?

A) an instrument paid in gold
B) an instrument paid in diamonds
C) an instrument paid in Japanese currency
D) an instrument paid in stocks

Question 49

Which of the following statements,if it appeared on a negotiable instrument,would destroy the negotiability of that instrument?

A) "Payment for tuition."
B) "This instrument arises out of a sales contract between Sam and Sandy."
C) "This instrument hereby incorporates by reference the sales contract between Sam and Sandy."
D) "This note is secured by a mortgage."
E) "Charge to miscellaneous expense."

Question 50

What problems hinder any efforts to establish uniform international rules for negotiable instruments? What additional variables are there in trying to establish a uniform international set of rules for negotiable instruments compared to doing so solely within the United States?

Question 51

Karen has a checking account at First Bank.Karen writes a check to Bonanza Apartments for her rent.In this situation:

A) Karen is the drawer; First Bank is the drawee; Bonanza is the payee
B) Karen is the drawee; First Bank is the drawer; Bonanza is the payee
C) Karen is the payee; First Bank is the drawee; Bonanza is the drawer
D) Karen is the payee; First Bank is the drawer; Bonanza is the drawee
E) Karen is the maker; First Bank is the drawee; Bonanza is the payee

Question 52

Alice Johnson issued a note payable over 24 equal monthly installments.The note contained a provision making the entire balance due immediately if Alice defaulted on two consecutive installments.The note contained:

A) an acceleration clause
B) a liquidated damages provision
C) a guarantee of prompt payment
D) a contingent executory payment

Question 53

What is the effect of a promissory note containing a conditional promise?

A) The note is void.
B) The note is enforceable even though it is nonnegotiable.
C) The note becomes negotiable once the condition is met.
D) The note is negotiable even though the promise is conditional.

Question 54

Which of the following would NOT create an express promise to pay?

A) "I owe you $100."
B) "I promise to pay you $100."
C) "The undersigned agrees to pay you $100."
D) "The signor agrees to pay you $100."

Question 55

Is the following instrument negotiable?"I promise to pay to the order of Mary Atkins the sum of $500 plus interest at the legal rate,on January 3,2003.The interest rate shall be 15 percent per year after January 3,2003.Further,I will pay the costs of collection if legal action is necessary to collect this amount.Dated this January 3,2001.(Signed)Colleen Smith."

A) Yes; this is a negotiable instrument.
B) No; there is not an unconditional promise or order to pay.
C) No; interest at the legal rates does not constitute a fixed amount.
D) No; the different interest rate after default destroys negotiability.
E) No; the additional promise to pay collection costs destroys negotiability.