Question 1

The issuer of a letter of credit:

Accepted Answer

A)  is obligated to honor drafts drawn under the letter if the conditions specified in the letter have been met. 
B)  has no duty to verify that the papers are properly supported by facts. 
C)  has no duty to verify that the underlying transaction has been performed. 
D)  all of the above. 
A)  is obligated to honor drafts drawn under the letter if the conditions specified in the letter have been met. 
B)  has no duty to verify that the papers are properly supported by facts. 
C)  has no duty to verify that the underlying transaction has been performed. 
D)  all of the above. D

Question 2

The creditor's failure to give the surety notice of default is not a defense.

Accepted Answer

A) True 
 B)False  True

Question 3

A guaranty of payment creates a(n):

Accepted Answer

A)  contract of surety. 
B)  contract of credit. 
C)  letter of credit. 
D)  absolute guaranty. 
A)  contract of surety. 
B)  contract of credit. 
C)  letter of credit. 
D)  absolute guaranty. D

Question 4

The creditor first must proceed against the debtor before suing the surety.

Accepted Answer

A) True 
 B)False

Question 5

A surety may raise the defense of lack of capacity of parties, absence of consideration, fraud, or mistake.

Accepted Answer

A) True 
 B)False

Question 6

Letters of credit are a form of advance arrangement for financing.

Accepted Answer

A) True 
 B)False

Question 7

An absolute guaranty creates the same obligation as a suretyship.

Accepted Answer

A) True 
 B)False

Question 8

A surety primarily is liable; ordinarily, a guarantor is only secondarily liable.

Accepted Answer

A) True 
 B)False

Question 9

Suretyship and guaranty transactions have the common feature of a promise to answer for the debt or default of another.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following contract defenses cannot be raised as a defense against suretyship obligations?

Accepted Answer

A)  lack of capacity 
B)  fraud 
C)  mistake 
D)  The surety may raise any defense that a party to an ordinary contract may raise. 
A)  lack of capacity 
B)  fraud 
C)  mistake 
D)  The surety may raise any defense that a party to an ordinary contract may raise.

Question 11

The amount of credit specified in a letter of credit must be taken by the beneficiary in the form of a lump-sum payment.

Accepted Answer

A) True 
 B)False

Question 12

Suretyship is governed by the UCC.

Accepted Answer

A) True 
 B)False

Question 13

The issuer of a letter of credit is in effect the obligor on a third-party beneficiary contract made for the benefit of the beneficiary of the letter.

Accepted Answer

A) True 
 B)False

Question 14

A letter of credit cannot extend for a period of more than five (5) years.

Accepted Answer

A) True 
 B)False

Question 15

The use of letters of credit arose in international trade.

Accepted Answer

A) True 
 B)False

Question 16

Under an indemnity contract, one person pays another consideration in return for a promise to pay a specified sum of money in the event that a specified loss is suffered.

Accepted Answer

A) True 
 B)False

Question 17

If the issuer of a letter of credit dishonors a draft without justification, it is liable to its customer for:

Accepted Answer

A)  fiduciary default. 
B)  breach of contract. 
C)  fiduciary peril. 
D)  monetary malfeasance. 
A)  fiduciary default. 
B)  breach of contract. 
C)  fiduciary peril. 
D)  monetary malfeasance.

Question 18

Otella borrowed $5,000 from a bank and was behind in her payments. Later, Armand wrote to the bank that Armand would "make good" Otella's obligations if Otella did not pay. Armand's agreement is:

Accepted Answer

A)  binding because it is written. 
B)  binding because it is supported by consideration. 
C)  invalid unless Otella also signs Otella's statement. 
D)  not binding because it is not supported by consideration. 
A)  binding because it is written. 
B)  binding because it is supported by consideration. 
C)  invalid unless Otella also signs Otella's statement. 
D)  not binding because it is not supported by consideration.

Question 19

An agreement under which one party agrees to pay drafts drawn by a creditor is called a:

Accepted Answer

A)  contract of surety. 
B)  guaranty contract. 
C)  letter of credit. 
D)  debtor's agreement. 
A)  contract of surety. 
B)  guaranty contract. 
C)  letter of credit. 
D)  debtor's agreement.

Question 20

Which of the following is correct concerning suretyship and guaranty?

Accepted Answer

A)  Each relationship always creates primary liability. 
B)  Each involves answering for the debt or default of another. 
C)  Each relationship of suretyship or guaranty must be in writing to be enforceable. 
D)  Each relationship always creates secondary liability. 
A)  Each relationship always creates primary liability. 
B)  Each involves answering for the debt or default of another. 
C)  Each relationship of suretyship or guaranty must be in writing to be enforceable. 
D)  Each relationship always creates secondary liability.

Exam 32: Nature of the Debtor-Creditor Relationship

The issuer of a letter of credit:

The creditor's failure to give the surety notice of default is not a defense.

A guaranty of payment creates a(n):

The creditor first must proceed against the debtor before suing the surety.

A surety may raise the defense of lack of capacity of parties, absence of consideration, fraud, or mistake.

Letters of credit are a form of advance arrangement for financing.

An absolute guaranty creates the same obligation as a suretyship.

A surety primarily is liable; ordinarily, a guarantor is only secondarily liable.

Suretyship and guaranty transactions have the common feature of a promise to answer for the debt or default of another.

Which of the following contract defenses cannot be raised as a defense against suretyship obligations?

The amount of credit specified in a letter of credit must be taken by the beneficiary in the form of a lump-sum payment.

Suretyship is governed by the UCC.

The issuer of a letter of credit is in effect the obligor on a third-party beneficiary contract made for the benefit of the beneficiary of the letter.

A letter of credit cannot extend for a period of more than five (5) years.

The use of letters of credit arose in international trade.

Under an indemnity contract, one person pays another consideration in return for a promise to pay a specified sum of money in the event that a specified loss is suffered.

If the issuer of a letter of credit dishonors a draft without justification, it is liable to its customer for:

Otella borrowed $5,000 from a bank and was behind in her payments. Later, Armand wrote to the bank that Armand would "make good" Otella's obligations if Otella did not pay. Armand's agreement is:

An agreement under which one party agrees to pay drafts drawn by a creditor is called a:

Which of the following is correct concerning suretyship and guaranty?

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