Negotiable Instruments

Question 1

To obtain office supplies for All-Care Medical Clinic, Britney executes a draft in favor of Chris. A draft is

a. a conditional promise to pay money.
b. an unconditional written order to pay money.
c. a qualified promise to set aside a sum of money.
d. a restricted promise to deliver goods at a future date.

Answer 1

b. an unconditional written order to pay money.

Question 2

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. time draft.
c. sight draft.
d. promissory note.

Answer 2

b. time draft.

Question 3

InterComp normally sells $50,000 worth of software to Power Source, a retail elec¬tronics 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 3

c. a trade acceptance.

Question 4

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 4

b. the drawer.

Question 5

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 the

a. drawee.
b. indorser.
c. payee.
d. drawer.

Answer 5

a. drawee.

Question 6

Alpha Company issues a trade acceptance with itself and Beta Company as parties. A trade acceptance is

a. a draft.
b. an order to accept delivery of money.
c. a promise to accept delivery of goods.
d. a promise to deliver goods.

Answer 6

a. a draft.

Question 7

If a bank is both the drawer and the drawee with regard to a draft, then the draft is a

a. certificate of deposit.
b. cashier’s check.
c. nonnegotiable instrument.
d. promissory note.

Answer 7

b. cashier’s check.

Question 8

Willy deposits $5,000 with Home State Bank on July 1, 2012. Home State Bank promises to repay Willy the $5,000 plus 3 percent annual interest on July 1, 2017. Home State Bank has issued Willy a

a. certificate of deposit.
b. cashier’s check.
c. trade acceptance.
d. draft.

Answer 8

a. certificate of deposit.

Question 9

Ron signs an instrument using an “R” with a circle around it. With this mark for a signature, the instrument is

a. negotiable.
b. nonnegotiable, because an initial does not state the signer’s name.
c. nonnegotiable, because an initial is not a signature.
d. nonnegotiable, because a simple initial implies a lack of binding intent.

Answer 9

a. negotiable.

Question 10

To borrow money to finance the start-up of his business, Bob executes an instrument in favor of City Bank. For the instru¬ment 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 10

a. anywhere on the instrument.

Question 11

Karen writes on a piece of paper, “I owe you $600,” signs it, and gives it to Lou. This instrument is

a. negotiable.
b. nonnegotiable, because it does not include an express promise to pay.
c. nonnegotiable, because it does not recite any consideration.
d. nonnegotiable, because it does not state any conditions to payment.

Answer 11

b. nonnegotiable, because it does not include an express promise to pay.

Question 12

Kelly signs an instrument in favor of Leo that states it is “subject to a cer-tain agreement between Kelly and Mona.” This instru¬ment is

a. negotiable.
b. nonnegotiable, because it is made subject to a separate agreement.
c. nonnegotiable, because it refers to a separate agreement.
d. nonnegotiable, because Kelly and Mona are not the same persons.

Answer 12

b. nonnegotiable, because it is made subject to a separate agreement.

Question 13

Kris wants one of Jasmine’s purebred Persian kittens. Kris signs an instrument in which she promises to pay Jasmine for a kitten. 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 in stock.

Answer 13

b. money.

Question 14

Maria signs an instrument payable to the order of National Loans, Inc., “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 deter¬mined from the face of the instrument.

Answer 14

a. negotiable.

Question 15

Ralph signs an instrument promising to pay a total of $10,000 to Martha in $1,000 monthly installments with the final payment being made on August 1. Ralph unexpectedly inherits $10,000 from his aunt on May 15. Ralph may

a. not complete his $10,000 payment before August 1.
b. complete his $10,000 payment before August 1.
c. increase his monthly payments by five percent, but not more.
d. increase his monthly payments by ten percent, but not more.

Answer 15

b. complete his $10,000 payment before August 1.

Question 16

Fred has six nieces, ages five to sixteen. He writes an order instrument for $50 that states, “Pay to the order of my niece.” The order instrument is

a.	negotiable.
b.	nonnegotiable, because the amount of money is less than $500.
c.	nonnegotiable, because it is illegal to write an order instrument 
	payable to a relative.
d.	nonnegotiable, because there is no specific person identified.

Answer 16

d. nonnegotiable, because there is no specific person identified.

Question 17

Efron transfers an instrument to First Citizens Bank. This is not a negotiation unless

a. the parties bargained over the amount paid for the instrument.
b. the transfer is an assignment.
c. the instrument is a negotiable instrument.
d. the transfer includes rights under a contract.

Answer 17

c. the instrument is a negotiable instrument.

Question 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. This 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 18

a. negotiable.

Question 19

Entrepreneur Auto Rentals owes Sole Saver Auto Dealership $2,000. Entrepreneur executes a note to Sole Saver as security for the debt. This security

a. does not constitute sufficient consideration for HDC status.
b. does not satisfy the value requirement for HDC status.
c. satisfies the consideration requirement for HDC status.
d. satisfies the value requirement for HDC status.

Answer 19

d. satisfies the value requirement for HDC status.

Question 20

At 1 A.M., on the sidewalk in front of Ace Credit Corporation, which is closed, Ben buys a $500 promissory note for $50 from Curt. When pre¬sented with Ben’s demand for payment, Diann, the maker of the note, could successfully claim that Ben

a. acquired the note with notice that it was overdue.
b. did not acquire the instrument in good faith.
c. did not give value for the instrument.
d. none of the choices.

Answer 20

b. did not acquire the instrument in good faith.

Question 21

Jeff’s grandmother is the payee of a promissory note for $7,500. Jeff’s grandmother gives Jeff the note for his sixteenth birthday. Jeff is

a. an HDC.
b. not an HDC, because he received the note as a gift.
c. not an HDC, because he is a minor.
d. not an HDC, because the note was for less than $10,000.

Answer 21

b. not an HDC, because he received the note as a gift.

Question 22

Beth, an accountant for Credits & Debits, acquires a negotiable instru¬ment from Ellen by promis¬ing to pay its face value in thirty days. Beth ac¬quires the status of an HDC when she

a. acquires possession of the negotiable instrument.
b. agrees with Ellen to buy the negotiable instrument.
c. pays the face value due on the instrument.
d. transfers the instrument to another party.

Answer 22

c. pays the face value due on the instrument

Question 23

Muni Investment Company signs a check payable to Enterprise Lenders, Inc., to buy a promissory note executed by Fallow Corporation. This check

a. does not constitute sufficient consideration for HDC status.
b. does not satisfy the value requirement for HDC status.
c. satisfies the consideration requirement for HDC status.
d. satisfies the value requirement for HDC status.

Answer 23

d. satisfies the value requirement for HDC status.

Question 24

Jill, in good faith and for value, gets from Kiley a negotiable bearer in¬stru-ment. Jill does not know that Kiley stole the instrument. Jill is

a. an HDC.
b. not an HDC, because Kiley did not acquire the instrument for value.
c. not an HDC, because Kiley did not acquire the instrument in good faith.
d. not an HDC, because the instrument is a bearer instrument.

Answer 24

a. an HDC.

Question 25

Elinor performs ten hours of house cleaning for Zack in exchange for a promissory note for $400. At the time that Elinor accepts the note, she is aware that bankruptcy proceedings are being filed against Zack. Elinor

a. can obtain HDC status.
b. cannot obtain HDC status, because she knows that there are bankruptcy proceedings against Zack.
c. cannot obtain HDC status, because she did not fulfill the value requirement.
d. cannot obtain HDC status, because she did not fulfill the good faith requirement.

Answer 25

a. can obtain HDC status.

Question 26

Wilson buys a promissory note from Oli. The note is due on December 5. December 5 is a Sunday. The note is

a. payable anytime the week of December 6.
b. payable December 6.
c. payable on December 5 only.
d. defective.

Answer 26

b. payable December 6.

Question 27

Dewey is the payee for a check written by Fred. Cash Credit Corporation (CCC) accepts the check from Dewey as part of a payment. CCC cannot become a HDC if

a. the check has been transferred more than once.
b. the check has been outstanding for one week.
c. the check has been outstanding for more than ninety days.
d. there are bankruptcy proceedings against Fred.

Answer 27

c. the check has been outstanding for more than ninety days.

Question 28

Stature Loan Company has notice that a promissory note is overdue if the note is a demand instrument and Stature takes it

a. an unreasonable time after its due date.
b. before its due date.
c. on its due date.
d. without noticing its due date.

Answer 28

a. an unreasonable time after its due date

Question 29

Rubin writes a check drawn on his account at Clearwater Bank and payable to the order of Gwyn. The bank does not pay the check. Rubin is

a. absolved of liability on the check.
b. liable to Gwyn for the amount of the check.
c. liable to the bank for the amount of the check.
d. entitled to payment of the amount of the check from Gwyn.

Answer 29

b. liable to Gwyn for the amount of the check.

Question 30

Biff signs a note “payable to the order of County Credit Union.” Unless Biff has a valid defense against payment, Biff’s liability on this note is

a. nothing.
b. primary.
c. secondary.
d. conditional.

Answer 30

b. primary.

Question 31

Ada is the maker of a note, on which Bart is secondarily liable. Cash & Credit Company (C&C) is the current holder of the note. Bart will be obli-gated to pay the note if

a. Ada defaults on the note.
b. C&C breaches a transfer warranty.
c. C&C negotiates the note to Delta Collection Agency, a third party.
d. C&C presents the note for payment.

Answer 31

a. Ada defaults on the note.

Question 32

Jackson pays Phil in good faith for a promissory note. Phil warrants that the draft has not been altered. This warranty is a

a. presentment warranty.
b. consideration warranty.
c. conditional warranty.
d. fixed warranty.

Answer 32

a. presentment warranty.

Question 33

Cash National Bank is an HDC of a note for $1,000 on which there is the forged signature of “Dudley.” If sued on the note by Cash

a. Dudley must pay the note.
b. Dudley’s best defense would be fraud in the execution.
c. Dudley’s best defense would be material alteration.
d. Dudley’s best defense would be forgery.

Answer 33

d. Dudley’s best defense would be forgery.

Question 34

Opalina asks Paolo, who does not understand English, to sign what Opalina says is an application to open a bank account. In fact, the “application” is a note. If sued on the note by an HDC

a. Paolo must pay the note.
b. Paolo’s best defense would be fraud in the execution.
c. Paolo’s best defense would be fraud in the inducement.
d. Paolo’s best defense would be mistake.

Answer 34

b. Paolo’s best defense would be fraud in the execution.

Question 35

Burt, a mentally impaired person, is asked by Carl to sign a piece of pa¬per that Carl says is an autograph book. In fact, the document is a note. If later sued on the note by an HDC

a. Burt must pay the note.
b. Burt’s best defense would be fraud in the execution.
c. Burt’s best defense would be fraud in the inducement.
d. Burt’s best defense would be mistake.

Answer 35

b. Burt’s best defense would be fraud in the execution.