Deck 38: Negotiable Instruments

Question 1

A two-party instrument in which one person makes an unconditional promise in writing to pay another person,with or without interest,either on demand or at a specified,future time is a _____.

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

Answer 1

A
Explanation: A promissory note is a two-party instrument in which one person (known as the maker) makes an unconditional promise in writing to pay another person (the payee), a person specified by that person, or the bearer of the instrument, a fixed amount of money, with or without interest, either on demand or at a specified, future time. It is the simplest form of commercial paper.

Question 2

Which of the following is true of the articles of the Uniform Commercial Code?

A) The law of commercial paper is covered in Article 3 and Article 4 of the Uniform Commercial Code.
B) Revised Article 3 of the Uniform Commercial Code developed in 1990 has now been adopted by all the states.
C) The law of commercial paper was originally adopted in Article 5 of the Uniform Commercial Code.
D) Negotiable documents, such as investment securities and documents of title, are not treated in the Uniform Commercial Code.

Answer 2

A
Explanation: The law of commercial paper is covered in Article 3 (Negotiable Instruments) and Article 4 (Bank Deposits and Collections) of the Uniform Commercial Code. Other negotiable documents, such as investment securities and documents of title, are treated in other articles of the Code. Revised Article 3 of the UCC, developed in 1990, has now been adopted by all the states except New York.

Question 3

An instrument can be made payable to two or more payees.

Answer 3

True

Question 4

A check is a draft payable on demand and drawn on a bank.

Question 5

The attribute of negotiability means that commercial paper can be readily transferred and accepted as a substitute for money.

Question 6

Commercial paper is:

A) the basic selling document of a 1933 Act registered offering.
B) a public offer by a bidder to purchase a target company's equity securities.
C) a way to either issue immediate payment or to extend credit.
D) any unit of goods that is treated by commercial usage as a single whole.

Question 7

If an instrument is undated,its "date" is the date it is issued by the maker or drawer.

Question 8

A term authorizing the confession of judgment on an instrument when it is due affects the negotiability of the instrument.

Question 9

Negotiability is the same as validity or collectability if the instrument is commercial paper.

Question 10

When the terms of a check are ambiguous,handwritten terms prevail over printed terms.

Question 11

Commercial paper cannot be used as a means of extending credit.

Question 12

Which of the following statements is true of commercial paper?

A) It cannot be used as a means of extending credit.
B) It is covered in Article 5 and Article 6 of the Uniform Commercial Code.
C) It can be accepted as a substitute for money.
D) It lacks the attribute of negotiability.

Question 13

An instrument does not qualify as a check if it is described on its face by another term such as "money order."

Question 14

The negotiability of an instrument is affected by a statement of the transaction that gave rise to the instrument.

Question 15

An instrument that meets all of the formal requirements for negotiability is not a negotiable instrument if it is unenforceable or uncollectible for other reasons.

Question 16

A draft is a form of commercial paper that involves a promise to pay money.

Question 17

A certificate of deposit is:

A) an instrument in which the maker makes an unconditional promise to pay a fixed amount of money with interest to the payee on demand.
B) the most widely used form of commercial paper that is a draft payable on demand and drawn on a bank.
C) an instrument in which the maker makes an unconditional promise to pay a fixed amount of money without interest to the payee at the specified future time.
D) an instrument containing an acknowledgment by a bank that it has received a deposit of money and a promise to repay the sum of money.

Question 18

An instrument that does not meet the formal requirements for negotiability will be treated as a simple contract rather than a negotiable instrument.

Question 19

An instrument can qualify as a negotiable instrument even if it includes a clause concerning giving,maintaining,or protecting collateral to secure payment.

Question 20

For an instrument to be negotiable,a person must be able to take it free of many of the risks assumed by the assignee of a regular contract.

Question 21

Ricardo borrowed $5,000 from his friend,Lorenzo.Ricardo signed a handwritten note stating,"I promise to pay $5,000 to Lorenzo on or before August 1,2001,in return for the same amount borrowed from him on May 1,2001." Under these circumstances,the note is _____.

A) negotiable because it was handwritten
B) not negotiable because the note states the reason for the debt
C) not negotiable because the note is not payable to bearer or to order
D) negotiable because it is a simple contract

Question 22

Which of the following will destroy the negotiability of an instrument?

A) Postdating the negotiability of an instrument
B) Conditioning payment on the payee's performance
C) Using phrases such as "please pay" or "pay to the order of"
D) Antedating the negotiability of an instrument

Question 23

Carlos borrowed $100 from his friend,Juanita.Carlos signed a handwritten note stating,"I promise to pay $100 to the order of Juanita." Under these circumstances,the note is _____.

A) negotiable because it is a simple contract
B) not negotiable because it does not acknowledge the reason for the debt
C) not negotiable because it does not state the time payment is due
D) negotiable because it meets all the requirements for negotiability

Question 24

If an instrument meets all of the formal requirements required for negotiability,_____.

A) it is negotiable even though it is void or unenforceable for other reasons
B) it cannot be held by a person who had no notice of certain defenses against payment
C) its validity is automatically conferred
D) it is nonnegotiable if uncollectible

Question 25

A teller's check is a:

A) draft drawn by a bank on any other financial institutions other than a bank.
B) check drawn by a bank on an individual's funds.
C) draft on which the drawer or drawee are the same bank.
D) draft drawn by a bank on another bank or payable at or through a bank.

Question 26

Which of the following instruments is negotiable?

A) A note that states, "I promise to pay Vlad $800 if he repairs my car"
B) An instrument that provides, "Payment is subject to the terms of a contract dated November 20, 2009"
C) A note that contains the statement, "This note is secured by a mortgage dated July 01, 2009"
D) An instrument that reads, "I promise to pay to the order of Collin Corp. $550 sixty days after the delivery of my new refrigerator"

Question 27

A promise or order is "payable on demand" if it states that it is payable:

A) only to the bearer.
B) on a particular date.
C) on the fulfillment of a condition.
D) at the will of the holder of the instrument.

Question 28

Which of the following is true of the negotiability of a written instrument?

A) The Uniform Commercial Code considers only instruments that are handwritten as negotiable.
B) An instrument written on a piece of wrapping paper will be considered a poor business practice and will not be negotiable.
C) The writing of an instrument does not have to be on any particular material; all that is required is that it be in writing to be negotiable.
D) An instrument written in pencil does not qualify as a negotiable instrument.

Question 29

One of the basic requirements for an instrument to be negotiable is that it must be payable:

A) to a specific person.
B) in cash or kind.
C) "to order" or "to bearer."
D) on fulfillment of a conditional promise.

Question 30

If an instrument is nonnegotiable,_____.

A) the Uniform Commercial Code controls the rights, and the general rules of property law control liabilities of the parties involved
B) the general rules of contract law control the rights and liabilities of the parties involved
C) the Uniform Commercial Code controls the rights, and the general rules of comparative law control the liabilities of the parties involved
D) the general rules of tort law control the rights and liabilities of the parties involved

Question 31

A note in which the maker states,"I promise to pay to the order of Oliver $600 or a six-string guitar" is:

A) not negotiable because it contains a conditional promise.
B) negotiable for payment of the guitar only.
C) negotiable for payment only if Oliver is the holder of the instrument.
D) not negotiable because it is not payable for money alone.

Question 32

A _____ is a draft on which the drawer or drawee are the same bank (or branches of the same bank).

A) cashier's check
B) teller's check
C) promissory note
D) certificate of deposit

Question 33

The Federal Trade Commission has adopted a regulation that:

A) follows the traditional rights of a holder in due course in consumer purchase transactions.
B) alters the rights of a holder in due course in consumer purchase transactions.
C) prevents a consumer who gives a negotiable instrument to use the defense of fraudulent inducement.
D) denies all rights of a holder in due course in consumer purchase transactions.

Question 34

A traveler's check that requires,as a condition to payment,the countersignature of a person whose specimen signature appears on the draft is:

A) negotiable.
B) not negotiable.
C) negotiable only if it is payable "to cash."
D) not negotiable only if it is payable "at sight."

Question 35

Which of the following statements is true of the monetary aspect of a promise or order in a negotiable instrument?

A) The promise or order in a negotiable instrument must be to pay a fixed amount of money.
B) The requirement of a "fixed amount" in a negotiable instrument applies only to interest and not principal.
C) The amount of any interest payable is not described in the instrument.
D) The amount of principal is calculated by reference to the formula or index referenced in the instrument if a variable rate of interest is prescribed.

Question 36

A note which contains the statement,"I owe you $500":

A) constitutes an order to pay.
B) constitutes a promise to pay.
C) is not a negotiable instrument.
D) does not acknowledge a debt.

Question 37

Nigel,a resident of North Carolina,sent Claude,a resident of Lyon,France,a note that read,"Ninety days after date,I promise to pay to the order of Claude €5,000 (signed)Nigel." The note is:

A) payable in an equivalent dollar amount.
B) not payable in the foreign money specified.
C) payable on demand in the foreign money specified.
D) payable at sight in an equivalent dollar amount.

Question 38

A draft is a:

A) two-party instrument.
B) three-party instrument.
C) single-party instrument.
D) non-negotiable instrument.

Question 39

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

A) An instrument in the form of a note must be signed by the payee who accepts the promise of the issuer.
B) An instrument in the form of a draft must be signed by the person giving the instruction to pay.
C) An instrument is not considered to be negotiable when the maker signs by writing his name on it.
D) A person or company cannot authorize an agent to sign instruments for it.

Question 40

A holder in due course takes the instrument free of all:

A) defenses and claims to the instrument.
B) defenses and claims to the instrument except those which concern its validity.
C) defenses and claims to the instrument except those which concern its negotiability.
D) defenses and claims to the instrument including defenses of duress or infancy.

Question 41

Franklin Corp.sold money orders to drugstores.The money orders contained the words,"Payable to," followed by a blank.Can the money order qualify as a negotiable instrument?

Question 42

Which of the following rules of interpretation is applied to resolve conflict or ambiguity in a check?

A) Printed terms prevail over typewritten terms.
B) Typewritten terms prevail over handwritten terms.
C) Where words and numbers conflict, the words control the numbers.
D) Where handwritten terms and printed terms conflict, printed terms prevail over handwritten terms.

Question 43

Jamal borrowed money from Amir to buy school supplies.He drew up and signed the following promissory note,"IOU,Amir Shah,the sum of $30 for value received.Jamal Khan." Is the note a negotiable instrument?

Question 44

An instrument states,"Subject to Approval of Title,Pay to the Order of Yvette,$3000." Is the instrument negotiable?

Question 45

A "bearer paper" is a check:

A) made payable to the order of cash.
B) that can be transferred only by indorsement.
C) that can be negotiated only by indorsement.
D) that is payable to the order of a specific person.

Question 46

Tasmia signed a check payable to the order of Shubha.The check contained an obvious variance between the numbers and the written words.The numbers indicated that the bank should pay $13,000 to the order of Shubha,but the written words indicated the bank should pay "the sum of thirteen hundred dollars." Under these circumstances what amount,if any,should the bank pay to the order of Shubha?

A) $1,300
B) $13,000
C) $6,500
D) $650

Question 47

What is the difference between a promissory note and a check? Why is the distinction important?

Question 48

Identify the statement that holds true of revised Article 3 of the Uniform Commercial Code regarding checks.

A) Under revised Article 3, an instrument does not qualify as a check if it contains the engraving "money order" on its face.
B) Revised Article 3 prevents an instrument from meeting the "unconditional promise" if it requires a countersignature of a person whose specimen signature appears on the draft.
C) Under revised Article 3, a payor bank may pay a postdated check before the stated date unless the drawer has notified the bank of postdating pursuant to a procedure set out in the Code.
D) Revised Article 3 states that an instrument which names a fixed time for payment should not contain a clause permitting the time for payment to be accelerated at the option of the maker.

Question 49

Under revised Article 3 of the Uniform Commercial Code,an exception to the rule that an instrument payable on demand is not payable before the date of the instrument is made for:

A) checks.
B) promissory notes.
C) a holder in due course.
D) certificates of deposits.

Question 50

Heidi borrowed $35,000 from Leopold Mortgage Corp.and signed a promissory note secured by a deed of trust on the land she owned.The note provided for interest at "30% over prime to be adjusted monthly." Is a note providing for a variable amount of interest,not ascertainable from the face of the note,a negotiable instrument?