Chapter 12 - The Function and Creation of Negotiable Instruments

Question 1

acceleration clause

Answer 1

(1) a clause in an installment contract that provides for all future payments to become due immediately on the the failure to tender timely payments or on the occurrence of a specified event
(2) a clause in a mortgage loan contract that makes the entire loan balance become due if the borrower misses or is late making monthly payments

Question 2

acceptance

Answer 2

(1) in contract law, the offeree’s notification to the offeror that the offeree agrees to be bound by the terms of the offeror’ proposal. Although historically the terms of acceptance had to be the mirror image of the terms of the offer, the Uniform Commercial Code provides that even modified terms of the offer in a definite expression of acceptance constitute a contract
(2) in negotiable instruments law, the drawee’s signed agreement to pay a draft when presented

Question 3

acceptor

Answer 3

• the person (drawee) who accepts a draft and who agrees to be primarily responsible for its payment

Question 4

banker’s acceptance

Answer 4

• a negotiable instrument that is commonly used in international trade
• a banker’s acceptance is drawn by a creditor against the debtor, who pays the draft at maturity
• the drawer creates a draft without designating a payee
• the draft can pass through many parties’ hands before a bank (drawee) accepts it, transforming the draft into a banker’s acceptance
• acceptances can be purchased and sold in a way similar to securities

Question 5

bearer

Answer 5

• a person in possession of an instrument payable to bearer or indorsed in blank

Question 6

bearer instrument

Answer 6

• any instrument that is not payable to a specific person, including instruments payable to the bearer or to “cash”

Question 7

certificate of deposit (CD)

Answer 7

• a note of a bank in which a bank acknowledges a receipt from a party and promises to repay the money, with interest, to the party on a certain date

Question 8

check

Answer 8

• a draft drawn by a drawer ordering the drawee bank or financial institution to pay a certain amount of money to the holder on demand

Question 9

draft

Answer 9

• any instrument (such as a check) drawn on by a drawee (such as a bank) that order the drawee to pay a certain sum of money, usually to a third party (the payee), on demand or at a definite future time

Question 10

drawee

Answer 10

• the party that is ordered to pay a draft or check

- with a check, a financial institution is always the drawee

Question 11

drawer

Answer 11

• the party the initiates a draft (writes a check, for example), thereby ordering the drawee to pay

Question 12

extension clause

Answer 12

• a clause in a time instrument that allows the instrument’s dats of maturity to be extended into the future

Question 13

holder

Answer 13

• any person in the possession of an instrument drawn, issued, or endorsed to him or her, to his or her order, to bearer, or in blank

Question 14

issue

Answer 14

• the first transfer, or delivery, of an instrument to a holder

Question 15

maker

Answer 15

• one who promises to pay a certain sum to the howler of a promissory note or certificate of deposit (CD)

Question 16

negotiable instrument

Answer 16

• a signed writing that contains an unconditional promise or order to pay an exact sum of money, on demand or at an exact future date, to a specific person or holder, or to bearer

Question 17

order instrument

Answer 17

• a negotiable instrument that is payable “to the order of an identified person” or “to an identified person or order

Question 18

payee

Answer 18

• a person to whom an instrument is made payable

Question 19

presentment

Answer 19

• the act of presenting an instrument to the party liable in the instrument to collect payment; presentment also occurs when a person presents an instrument to a drawee for acceptance

Question 20

promissory note

Answer 20

• a written promise made by one person (the maker) to pay a fixed sum of money to another perish (the payee or a subsequent holder) on demand or on a specified date

Question 21

signature

Answer 21

• under the Uniform Commercial Code, “any symbol executed or adopted by a party with a present intention to authenticate a writing”

Question 22

trade acceptance

Answer 22

• a draft that is drawn by a seller of goods ordering the buyer to pay a specified sum of money to the seller, usually at a states time in the future
• the buyer accepts the draft by signing the face of the draft, thus creating an enforceable obligation to pay the draft when it comes due
• on a trade acceptance, the seller is both the drawee and the payee

Question 23

SAMPLE TEST QUESTIONS

1. On April 1, Richard arranges to buy a sixteen-speed bike from his neighbor Phil for $500. Phil agrees to deliver the bike on May 1. Richard writes a draft for $500 payable to Phil on May 1. In this situation, the draft is :
   a. a certificate of deposit
   b. a time draft
   c. a sight draft
   d. a promissory note

Answer 23

ANSWER :
(B)
CORRECT :
(B)

Question 24

SAMPLE TEST QUESTIONS

2. InterComp normally sells $50,000 worth of software to Power Source, a retail electronics store, each summer on terms requiring payment in sixty days. One year, InterComp wants cash, but Power Source wants the usual sixty days. To meet both needs, the parties can arrange :
   a. a certificate of deposit
   b. a bearer bond
   c. a trade acceptance
   d. an international letter of credit

Answer 24

ANSWER :
(C)
CORRECT :
(C)

Question 25

SAMPLE TEST QUESTIONS

3. To obtain a business license, Bess writes a check to a certain state agency. Bess is :
   a. the drawee
   b. the drawer
   c. the indorser
   d. the payee

Answer 25

ANSWER :
(B)
CORRECT :
(B)

Question 26

SAMPLE TEST QUESTIONS

4. Sarah has a checking account at Secure Bank. Sarah buys her roommate Sophie’s two tickets to a Broadway musical for $200. Sarah writes Sophie a check for the tickets. In this situation, Secure Bank is :
   a. the drawee
   b. the indorser
   c. the payee
   d. the drawer

Answer 26

ANSWER :
(A)
CORRECT :
(A)

Question 27

FACT PATTERN 12-1B
Thalia signs an instrument unconditionally promising to pay to “Union Bank” $7500 with interest in installments with the final payment due June, 1, 2017.

Question 28

FACT PATTERN 12-1B

5. Refer to Fact Pattern 12-1B. The instrument that Thalia signed is most likely :
   a. a certificate of deposit
   b. a draft
   c. an order to pay
   d. a promissory note

Answer 28

ANSWER :
(D)
CORRECT :
(D)

Question 29

FACT PATTERN 12-1B

6. Refer to Fact Pattern 12-1B. With respect to this instrument, Union Bank is :
   a. the drawee
   b. the indorser
   c. the maker
   d. the payee

Answer 29

ANSWER :
(D)
CORRECT :
(D)

Question 30

SAMPLE TEST QUESTIONS

7. Evermore Bank is both the drawer and the drawee with regard to a draft issued to Fernando. The draft is :
   a. a certificate of deposit
   b. a cashier’s check
   c. a nonnegotiable instrument
   d. a promissory note

Answer 30

ANSWER :
(C)
CORRECT :
(B)

Question 31

SAMPLE TEST QUESTIONS

8. Willy deposits $5,000 with Home State Bank on July 1, 2012. Home State Bank promises to repay Willy the $5,000 with 3 percent annual interest on July 1, 2017. This is :
   a. a certificate of deposit
   b. a cashier’s check
   c. none of these choices
   d. a draft

Answer 31

ANSWER :
(A)
CORRECT :
(A)

Question 32

SAMPLE TEST QUESTIONS

9. Efron borrows money to pay his tuition and signs a note payable to First Citizens Bank. The bank assigns the note to Guaranty Bank. The assignment :
   a. does not affect Efron’s obligation to pay the note as promised
   b. frees Efron of the obligation to pay the note
   c. results in Guaranty Bank’s co-liability on the note with Efron
   d. results in Guaranty Bank’s co-liability on the note with First Citizens Bank

Answer 32

ANSWER :
(D)
CORRECT :
(A)

Question 33

SAMPLE TEST QUESTIONS

10. To borrow money to finance the start-up of his business, Rollo executes an instrument in favor of a Security Bank. For the instrument to be negotiable, the signature must be :
    a. anywhere on the instrument
    b. anywhere on the lower half of the instrument only
    c. in the lower left-hand corner of the instrument only
    d. in the lower right-hand corner of the instrument only

Answer 33

ANSWER :
(D)
CORRECT :
(A)

Question 34

SAMPLE TEST QUESTIONS

11. Northwest Energy Corporation signs an instrument that states it is being executed “as per contract for a purchase of 4,000 barrels of oil dated September 1.” This instrument is :
    a. negotiable
    b. nonnegotiable, because information about the sale must be obtained from another source
    c. nonnegotiable, because it states an express condition to payment
    d. nonnegotiable, because the terms of the contract are not clear on the face of the instrument

Answer 34

ANSWER :
(C)
CORRECT :
(A)

Question 35

SAMPLE TEST QUESTIONS

12. Bart, the owner of Clear Cut Corporation, signs an instrument that includes the phrase “payment for this note will be made from the proceeds of next year’s timber sale.” This instrument is :
    a. negotiable
    b. nonnegotiable, because payment can be made only out of a particular source
    c. nonnegotiable, because it states an express condition to payment
    d. nonnegotiable, because the exact amount payable cannot be determined from the face of the instrument

Answer 35

ANSWER :
(D)
CORRECT :
(A)

Question 36

SAMPLE TEST QUESTIONS

13. Eden signs a promissory note payable to the order of First Mortgage Company. The note states that it is payable “with interest at the legal rate.” This note is :
    a. negotiable
    b. nonnegotiable, because it does not specify a rate of interest
    c. nonnegotiable, because it is payable with interest
    d. nonnegotiable, because the exact amount payable cannot be determined from the face of the instrument

Answer 36

ANSWER :
(C)
CORRECT :
(A)

Question 37

SAMPLE TEST QUESTIONS

14. Brie wants one of Cari’s purebred Dalmations. Brie signs an instrument in which she promises to pay Jasmine for a puppy. The instrument will be negotiable if it is payable in :
    a. goods of equal market value
    b. money
    c. any of the choices
    d. shares of stock

Answer 37

ANSWER :
(C)
CORRECT :
(B)

Question 38

SAMPLE TEST QUESTIONS

15. Grace signs an instrument payable to the order of Hillside Credit Union “on or before” June 15. This instrument is :
    a. negotiable
    b. nonnegotiable, because the maker can move up the payment date
    c. nonnegotiable, because moving up the payment date is optional
    d. nonnegotiable, because the exact payment date cannot be determined from the face of the instrument

Answer 38

ANSWER :
(B)
CORRECT :
(A)

Question 39

SAMPLE TEST QUESTIONS

16. Payday Loans, Inc., signs an instrument payable to the order of Oiana that states, “The maker of this note at the date of maturit, April, 1, 2016, can extend the time of payment, but for no more that a reasonable time.” This instrument is :
    a. negotiable
    b. nonnegotiable, because it includes an extension clause
    c. nonnegotiable, because it is not payable within a definite time
    d. nonnegotiable, because it is payable to a specific payee

Answer 39

ANSWER :
(B)
CORRECT :
(C)

Question 40

SAMPLE TEST QUESTIONS

17. Merry draws a check payable to “Cash” and presents it to National Bank for payment. This instrument is :
    a. a bearer instrument
    b. an order instrument
    c. valid but nonnegotiable
    d. void

Answer 40

ANSWER :
(A)
CORRECT :
(A)

Question 41

SAMPLE TEST QUESTIONS

18. To buy a stuffed cow, Ken executes a check “pay to Laura or bearer” and gives it to Laura, who does not own a stuffed cow. The check is :
    a. negotiable
    b. nonnegotiable, because it does not indicate a specific payee
    c. nonnegotiable, because it may be a joke
    d. nonnegotiable, because Laura does not own a stuffed cow

Answer 41

ANSWER :
(D)
CORRECT :
(A)

Question 42

SAMPLE TEST QUESTIONS

19. Trixie signs a $1,599 note payable, at 4.25 percent interest, on October 1 to Urban Bank and writes on its face that it is “nonnegotiable.” This note is :
    a. negotiable
    b. nonnegotiable, because it is dated
    c. nonnegotiable, because it is payable with interest
    d. nonnegotiable, because it includes the notation “nonnegotiable”

Answer 42

ANSWER :
(C)
CORRECT :
(D)

Question 43

SAMPLE TEST QUESTIONS

20. Cricket signs a check payable to the order of Discount Warehouse, Inc., that does not include a date. This check is :
    a. negotiable
    b. nonnegotiable, because it does not include a date
    c. nonnegotiable, because it is payable to a corporation
    d. nonnegotiable, because it is signed by the drawer

Answer 43

ANSWER :
(A)
CORRECT :
(A)