Introduction to Negotiable Instruments

Question 1

Define “Bearer Paper”

Answer 1

Instrument made payable in blank, to bearer, or to cash; transferred by delivery only

Question 2

Define “order payer.”

Answer 2

Instrument made payable to an individual or entity; transferred by indorsement and delivery

Question 3

List the parties who create negotiable instruments

Answer 3

1. )Drawers, for checks or drafts

2. )Makers, for notes and certificates of deposit

Question 4

Give an example of language on an instrument that would affect negotiability

Answer 4

1. )Language that makes the date of payment uncertain (“Payable when I pass the CPA Exam”)
2. )Language that affects the certainty of the sum due (“Payable at a rate to be determined later”)

Question 5

List the types of drafts

Answer 5

1. )Sight draft (on demand)
2. )Time draft
3. )Trade acceptance

Question 6

Define “accommodation party.”

Answer 6

A “person” who signs an instrument in any capacity for the purpose of lending his or her name as credit to another party on the instrument

Question 7

Give an example of language that results in bearer paper

Answer 7

“Pay to cash,” or “Pay to the order of cash,” or “Pay to Jane Downs or bearer”

Question 8

Describe the various types of checks that can be used to pay money

Answer 8

1. )Cashier’s check (bank is drawer and drawee)
2. )Teller’s check (draft drawn by one bank on another bank)
3. )Traveler’s check (draft payable on a bank that requires a countersignature)
4. )Certified check (check accepted by a drawee bank; obliges drawee bank to pay)
5. )Money order (is a check if drawn on a bank and payable on demand)

Question 9

List the requirements of a negotiable instrument

Answer 9

1. )In writing
2. )Signed by maker or drawer
3. )Contain an unconditional promise or order to pay
4. )State a sum certain in money
5. )Be payable on demand or at a definite time
6. )Be payable to order or bearer (words of negotiability)

Question 10

Define “negotiation.”

Answer 10

The transfer of possession of a negotiable instrument to a party who becomes a holder

Question 11

List the parties to a note or certificate of deposit (CD).

Answer 11

-Maker
-Payee
Note: There is no maker of a check, only notes and CDs; liability of these parties is different, so use the terms carefully.

Question 12

List the parties to a draft or a check

Answer 12

1. )Drawer
2. )Drawee
3. )Payee

Question 13

List some examples of nonnegotiable instruments

Answer 13

1. )Letters of credit
2. )Warehouse receipts
3. )Bills of lading
4. )Stocks and bonds
5. )Contracts

Question 14

Give an example of language that results in order paper

Answer 14

“Pay to the order of Jane Downs”

Question 15

List the two types of negotiable instruments

Answer 15

1. )Orders to pay (checks and drafts)

2. )Promises to pay (notes and certificates of deposit).

Question 16

Describe the writing requirement of a negotiable instrument

Answer 16

Must have be on something with a degree of permanence and be readily transferable

Question 17

Define “demand instrument.”

Answer 17

Those that are payable immediately upon issue, such as “payable at sight” or “payable upon presentation,” or those for which no time period is specified

Question 18

Define “indorsement.”

Answer 18

Signature by a payee for purposes of negotiation