Chapter 12: "The Function and Creation of Negotiable Instruments"

Question 1

A negotiable instrument can function as a substitute for cash or an extension of credit.

Answer 1

True

Question 2

A fundamental function of negotiable instruments is to make sure that the instrument can be easily transferred without danger of being uncollectible.

Answer 2

True

Question 3

The Uniform Commercial Code article that deals with negotiable instruments is Article___.

Answer 3

3

Question 4

If a seller of goods is both the drawer and the payee of a draft, the drawer has created a ______

Answer 4

Trade Acceptance.

a trade acceptance is a document that is used in the sale of goods. The seller draws up the draft, which order the buyer to pay a certain amount to the seller. The seller of the goods is both the drawer and the payee.

Question 5

6 Requirements for Negotiability

Answer 5

Be in writing.

Be signed by the maker or the drawer.

Be an unconditional promise or order to pay.

State a fixed amount of money.

Be payable on demand or at a definite time.

Be payable to order or to bearer.

Question 6

Sergio gets a haircut from Amelia and writes a check made out to her. In this transaction, the drawee is:

a. Sergio because he drew up the check to be charged to his account.	
b. the bank on which the check is drawn, because it must pay the check.	
c. no one in this situation.	
d. Amelia, because the check is payable to her.

Answer 6

b. the bank on which the check is drawn, because it must pay the check.

Question 7

Assignment of a promissory note does not affect the maker’s obligation to pay the note as promised.

a. True
b. False

Answer 7

a. True

Question 8

To be negotiable, a promissory note does NOT require that the:

a. note be payable on demand or at some specified future date.	
b. note be payable in U.S. or foreign currency.	
c. promise be made orally.

Answer 8

c. promise be made orally.

Question 9

A statement in an instrument that only allows payment to be made from a designated fund:

a. renders the note nonnegotiable.	
b. creates a conditional promise.	
c. does not render the note nonnegotiable.

Answer 9

c. does not render the note nonnegotiable.

Drafts, such as checks, often specify that payment be made from a particular fund. Notes, for example, that include the condition that payment will be made out of the proceeds of next year’s cotton crop will not make the note nonnegotiable. Such statements do not render an instrument nonnegotiable.

Question 10

Claude creates and signs a promissory note in which he promises to pay Audrey 1,000 euros, plus $1,000 worth of custom-made shirts on May 15th, in exchange for Audrey’s help in renovating his kitchen. The note is:

• hint
  Are there any circumstances under which the amount fixed in a negotiable instrument can be paid in other than money?a. negotiable because all of the elements of the note are valid.
  b. nonnegotiable because it calls for partial payment in shirts.
  c. nonnegotiable because it calls for payment in euros.

Answer 10

b. nonnegotiable because it calls for partial payment in shirts.

Question 11

For an instrument to be negotiable, it must contain a(n) expressed promise or order to pay.

Answer 11

True

Question 12

A mere acknowledgement of a debt, such as “I owe you” is NOT sufficient under the UCC.

T/F

Answer 12

True

Question 13

A(n) order directs a third party to pay the instrument as drawn.

T/F

Answer 13

True

Question 14

An order may be addressed to one or more than one person, either jointly or alternatively .

T/F

Answer 14

True

Question 15

Stephanie needs to have her car’s radiator replaced so she takes it to Jesse, who makes the necessary repairs. Stephanie writes him a check. In this transaction, presentment occurs when:

a. Jesse presents the check to Stephanie's bank.	
b. Stephanie's bank presents her with the cancelled check.	
c. Stephanie presents the check to Jesse.	
d. Stephanie writes the check.

Answer 15

a. Jesse presents the check to Stephanie’s bank.

Question 16

Why is an instrument that is undated and made payable “15 days after date” nonnegotiable?

a. Because there is no way to determine the maturity date from the face of the instrument.	
b. Because the instrument is payable at a definite time.	
c. Because such instruments have to be payable one month after date.

Answer 16

a. Because there is no way to determine the maturity date from the face of the instrument.

Question 17

An extension clause of a negotiable instrument is
the reverse of an acceleration clause

T/F

Answer 17

True

Question 18

Hung agrees to buy Trudy’s ranch and they draw up a note under which he pays her in three installments on specific dates. Trudy has concerns about Hung’s ability to pay on time, so she includes an acceleration clause. Such a clause would allow Trudy to:

a. demand payment of the entire amount Hung owes her if a certain event occurs.	
b. accelerate the sale of the ranch.	
c. accelerate the statute of limitations in a case involving negotiable instruments.

Answer 18

a. demand payment of the entire amount Hung owes her if a certain event occurs.

An acceleration clause allows the holder of the time instrument to demand payment of the entire amount before its contractual due date if a certain event occurs, such as a missed payment in an installment contract.

Question 19

An instrument is not negotiable unless it is payable to order or to bearer at the time it is issued or first comes into the possession of the holder. a. True

b. False

Answer 19

a. True

Question 20

With respect to order instruments, an identified person is the person to whom the instrument is initially payable as determined by the intent of the maker or drawer.

Answer 20

TRUE

Question 21

The identified person in an order instrument may transfer the instrument to whomever he or she wishes.

Answer 21

TRUE

Question 22

A maker or drawer has agreed to pay either the person specified on the instrument or whomever that person might designate, thus retaining the instrument’s transferability .

Answer 22

TRUE

Question 23

With order instruments, the person specified must be identified with certainty .

Answer 23

TRUE

Question 24

Samantha writes out a check “Payable to the order of XXXX Fine Corporation”. No such corporation exists. Therefore, the instrument is a bearer instrument

T/F

Answer 24

FALSE

the instrument is not a negotiable instrument

Question 25

Delany makes out an instrument payable to Captain Terrible. This instrument is negotiable as a bearer instrument.

T/F

Answer 25

TRUE

Question 26

A check made out to “cash” and signed by the writer is
a bearer instrument

T/F

Answer 26

TRUE

Question 27

When Duncan writes a check to purchase jewelry, he writes $250.00 in the small box on the right-hand side of the check. But then in clear handwriting he writes out “Two hundred seventy dollars and no/100.” Duncan is liable for $270.00 multilateral and bilateral treaties

Answer 27

TRUE