Deck 25: Negotiable Instruments

Question 1

A person can sign an instrument as an authorized agent of the drawer, but the instrument is not negotiable unless the drawer also signs it.

Answer 1

False

Question 2

Businesses use the commercial money market for short-term borrowing.

Answer 2

True

Question 3

The first delivery of an instrument by the maker or drawer for the purpose of giving rights in the instrument to any person is referred to as its demand .

Answer 3

False

Question 4

An instrument must name a specific payee and be made payable at a definite time to qualify as a promissory note.

Question 5

When a bank is both the drawer and drawee, a check functions the same as cash because the bank has committed itself to paying the item on demand.

Question 6

The assignment of a promissory note from one payee to another changes the maker's obligation to pay the note as promised.

Question 7

An instrument that orders the drawee to pay a certain sum of money, usually to a third-party payee, is a draft .

Question 8

A promissory note is both a debt and evidence of the debt.

Question 9

For a drawee to be obligated to honor an order to pay, the drawee must be obligated to the drawer.

Question 10

A check is not a demand instrument, because by definition a check is not payable for a period of time after its issue.

Question 11

To be negotiable, an instrument must condition its terms on the occurrence or nonoccurrence of some other event or agreement.

Question 12

The payee of a certificate of deposit is not allowed to withdraw the funds before the date of maturity, because the instrument is a time deposit.

Question 13

Because negotiable instruments were originally paper documents, they are sometimes referred to as a commercial paper.

Question 14

When a note is lost, impaired, or destroyed, the owner loses the right to be paid its value, even if its existence can be proved with a copy.

Question 15

A promissory note signed to obtain a student loan is a negotiable instrument that functions as an extension of credit.

Question 16

No drafts other than checks may be used in commercial transactions.

Question 17

An unusual signature clearly increases the marketability of an instrument because it creates distinction and uniqueness.

Question 18

For a negotiable instrument to operate practically as a substitute for cash, it must be easily transferable and uncollectible.

Question 19

Commonly used in international trade, a draft that orders a buyer's bank to pay is a cashier's check.

Question 20

A trade acceptance is created when, as part of a deal to buy wheat from Xi, Yang signs a draft ordering the buyer to pay for the wheat within ninety days.

Question 21

Stating with certainty a fixed amount of money to be paid at the time an instrument is payable ensures that the value of the item can be determined with clarity.

Question 22

With an order instrument, the payee must be identified with certainty because the transfer of the instrument requires his or her signature.

Question 23

If an instrument does not specify a time for payment and the instrument must be paid on presentment, it is not negotiable.

Question 24

The nature of an instrument, such as a check, may indicate that it is payable on demand.

Question 25

If the numerical and written amounts on a check differ, the check is payable in the written amount.

Question 26

If an instrument is payable within a definite period of time after being presented for payment, the maker or drawee is under no obligation to pay until that time.

Question 27

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 a holder.

Question 28

A promise that states an express condition to payment is negotiable if the condition is stated in writing on the instrument.

Question 29

An instrument is negotiable even if the payment is to be made from a fund that does not yet exist.

Question 30

To determine the value of an instrument, it is necessary to know when the obligations of secondary parties, such as indorsers, will arise.

Question 31

A note made in exchange for funds that contains an acceleration clause is not negotiable because the exact value of the note cannot be ascertained.

Question 32

To operate practically as a substitute for cash or a credit device, a negotiable instrument must be

A)conditional without the risk of being collectable.
B)transferable without the danger of being uncollectable.
C)qualified with a promise to set aside the qualification.
D)payable without recourse.

Question 33

On an instrument, a mere reference to another writing-"As per contract"- does not render the instrument nonnegotiable.

Question 34

LNG LLC and Mainline Corporation enter a contract for a sale of liquefied natural gas. LNG draws a draft unconditionally ordering Mainline to pay $50,000 to LNG's order in sixty days. Mainline signs and dates the draft. LNG can sell the draft to

A)Mainline only.
B)LNG's bank only.
C)any party after the draft has been paid.
D)any party before payment is due.

Question 35

Mortgage notes tied to a variable rate of interest -fluctuating in response to market conditions-are not negotiable.

Question 36

Special requirements for the form and content of negotiable instruments are imposed by

A)the Lex Mercatoria as codified in England.
B)the Uniform Commercial Code.
C)none of the choices.
D)rules developed by merchants in the medieval world.

Question 37

Fertile Farm Corporation and Grain Commodities Inc. enter a contract for a sale of soybeans. Fertile draws a draft unconditionally ordering Grain to pay $75,000 to Fertile's order in ninety days. Grain signs and dates the draft. Before payment is due, Fertile needs cash. The drawer can

A)submit the draft to the drawee for immediate payment.
B)market the contracted-for soybeans to obtain a higher price.
C)accelerate the date for payment on the draft.
D)sell the draft in the commercial money market.

Question 38

To determine the value of an instrument, it is necessary to know when the maker, drawer, or acceptor is required to pay.

Question 39

Bogart presents a sight draft to Commerce Bank for payment. A bank employee writes accepted across the face of the instrument, and adds the date and the bank's signature. The draft is

A)acknowledged as received, but not payable without further verification.
B)accepted and will be payable by the close of the next business day.
C)payable ninety days after sight.
D)payable immediately or within a stated time after sight.

Question 40

To be negotiable, if an instrument is not payable on demand, it must be payable at a definite time.

Question 41

Fresh Fruit Company accepts a check from Grocers Mart in payment on a shipment of apples, but Harvest Meat LLC will not accept a check for a beef order. Fewer checks are written today because

A)most transactions are electronic.
B)promissory notes have replaced checks as costs have risen.
C)the use of credit has become more widespread.
D)merchants are increasingly refusing to accept cash and checks.

Question 42

In an international sale of goods, Cielo SA, the buyer, and Drones Inc., the seller, use a banker's acceptance. Essentially, this instrument

A)promises that the maker will pay a specified amount to another party.
B)orders the buyer to pay a specified amount to the seller.
C)orders the buyer's bank to pay a specified amount to the seller.
D)acknowledges a deposit of funds payable to the holder.

Question 43

Jaime signs an instrument using a "J" with a swirl 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.

Question 44

Rico agrees to buy a bicycle from Salvatore for $250. Salvatore agrees to deliver the bike on September 1. Rico writes a draft for $250 payable to Salvatore on September 1. This is

A)none of the choices.
B)a time draft.
C)a sight draft.
D)a promissory note.

Question 45

Tree Nursery signs an instrument that states with certainty a fixed amount to be paid at the time the instrument is payable. Fixed amount means that the amount must be

A)stated as a fixed, not a variable, rate.
B)ascertainable from the face of the instrument.
C)determinable before the time it is payable.
D)all of the choices.

Question 46

App Corporation obtains a loan from Backer Bank and signs a note for the amount. For a certain price, the bank transfers the note to Credit Company. Promissory notes are commonly assigned, negotiated, or transferred from one party to another. This is possible because

A)as an issuer of a note, a bank commits to paying the stated amount.
B)assignment does not affect the maker's obligation to pay the note.
C)a buyer of the note becomes both the drawer and the payee.
D)a bank is both the maker of the note and the drawee.

Question 47

A certificate of deposit (CD)is issued when Lo-Risk Invest LLC deposits funds with Money Bank on the bank's promise to repay the funds, with interest, on a certain date. Lo-Risk cannot withdraw the funds before the date of maturity because

A)the bank is both the issuer of the instrument and the drawee.
B)a CD is a time deposit.
C)a CD cannot be sold or negotiated to a third party before maturity.
D)a CD is not a three-party instrument.

Question 48

Edie deposits funds with First National Bank, which issues an instrument that promises to repay the funds, with interest, on a certain date. Before the maturity date, Edie wants to access the funds. Edie can

A)submit the instrument to the maker for immediate payment.
B)withdraw the funds before the date of maturity.
C)advance the date for repayment.
D)sell the instrument to a third party.

Question 49

In a domestic sale of goods, Boxes LLC, the seller, and Containers Inc., the buyer, use a trade acceptance. Essentially, this instrument

A)promises that the maker will pay a specified amount to another party.
B)orders the buyer to pay a specified amount to the seller.
C)orders the buyer's bank to pay a specified amount to the seller.
D)acknowledges a deposit of funds payable to the holder.

Question 50

In response to an order for flour from Good Eating LLC, Harvest Mill creates a draft ordering Good to pay Harvest for the flour within sixty days and sends it with the delivery to Good. On receipt, the buyer signs the draft. On this instrument, Harvest is

A)neither the drawer nor the payee.
B)only the payee.
C)only the drawer.
D)both the drawer and the payee.

Question 51

Veggie Bowl Café signs an instrument in favor of Whole Wheat Company that states it is "subject to a certain agreement between buyer and seller." This instrument 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 the buyer and seller are not the same parties.

Question 52

Marin writes on a piece of paper, "I owe you $600," signs it, and gives it to Nye. 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.

Question 53

For a drawee to be obligated to honor a time draft, the drawee must be obligated to the drawer by

A)a stated time in the future.
B)an international trade agreement.
C)a commercial money market contract.
D)an account agreement or a debtor-creditor relationship.

Question 54

Juice Company signs an instrument that states it is being executed "as per a contract for the sale of a case of oranges dated May 1." This instrument is

A)negotiable.
B)nonnegotiable, because banks cannot easily process commodities.
C)nonnegotiable, because it includes the specific date of a contract.
D)nonnegotiable, because it refers to an express contract.

Question 55

Direct Connect Company orders a quantity of wire from Electric Supply Inc. To finance the purchase, Direct signs a note that includes a reference to the parties' contract, a payment schedule, and a security agreement. This note is

A)negotiable.
B)nonnegotiable, because it refers to the parties' contract.
C)nonnegotiable, because it refers to a payment schedule.
D)nonnegotiable, because it refers to a security agreement.

Question 56

Sport Souvenir LLC orders a gross of printed shirts from T-Shirt Company. To finance the purchase, the buyer signs a note to pay the seller from the funds paid to the buyer on the sale of the shirts at a certain event. This note is nonnegotiable because

A)the note is not a three-party instrument, such as a draft.
B)payment is to be made from a fund that does not yet exist.
C)the instrument does not contain an express promise to pay.
D)the note appears not to state a rate of interest.

Question 57

Steel Mill Inc. signs an instrument that states with certainty a fixed amount to be paid at the time the instrument is payable. This ensures that

A)the value of the instrument can be determined with clarity.
B)interest may be payable at a fixed or variable rate.
C)the amount may be determined by information not in the instrument.
D)the amount payable can fluctuate as a result of market conditions.

Question 58

Oda signs a promissory note payable to the order of Payday Loan 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 state a specific rate of interest.
C)nonnegotiable, because it is a promissory note.
D)nonnegotiable, because it is payable only with interest.

Question 59

Brie signs an instrument in which she promises to pay Carmen a certain price for her Dodge Dart. The instrument will be negotiable if it meets all of the requirements for negotiability, including that it is payable in

A)goods equal in value to the market price of the car.
B)money.
C)any of the choices.
D)services equal in value to the market price of the car.

Question 60

In payment for a shipment of fittings, Retool LLC offers Supply Company a cashier's check. A cashier's check functions the same as cash because

A)the bank has committed itself to paying the stated amount on demand.
B)the party to whom the check is payable is the bank.
C)the bank on which the check is drawn is not the drawer.
D)a check is not a debt-it is only the evidence of a debt.

Question 61

Bon signs a promissory note for $12,500 in favor of Car Loans Inc. The note specifies payment by a certain date and includes an option to pay early. This note is

A)negotiable.
B)nonnegotiable, because the date for payment is uncertain.
C)nonnegotiable, because the option violates negotiability requirements.
D)nonnegotiable, because the note need not be paid until the specified date.

Question 62

Brownies Inc. signs an instrument that promises to pay Chocolate Company a certain price, with interest, for a shipment of refined cocoa. By the terms of the instrument, it must be paid on its presentment, but no time for payment is specified. This instrument is

A)negotiable.
B)nonnegotiable, because it is only payable on presentment.
C)nonnegotiable, because no time for payment is specified.
D)nonnegotiable, because it is only payable on demand.

Question 63

Yun writes an instrument that states it is "payable to Zho Ltd." In fact, "Zho Ltd." does not exist. The instrument is

A)negotiable.
B)nonnegotiable, because it does not state that it is payable to order.
C)nonnegotiable, because it is payable to a nonexistent organization.
D)nonnegotiable, because it cannot be transferred by indorsement.

Question 64

Motor Sales Inc. signs an instrument that promises to pay National Parts Company a certain price, with interest, for a shipment of auto parts. It is necessary to know when the instrument is due in order to

A)determine the value of the instrument.
B)calculate when a statute of limitations may apply.
C)know when the interest will accrue.
D)all of the choices.

Question 65

On the back of an envelope, Phoebe writes, "I promise to pay Quint or bearer $600 on demand. [Signed] Phoebe." What type of instrument is this? Is it negotiable? If not, why not?

Question 66

Donut Shop signs a promissory note for $50,000 in favor of Enterprise Lending Inc. The note includes an acceleration clause. This note is

A)negotiable.
B)nonnegotiable, because the maker can move up the payment date.
C)nonnegotiable, because payment can be demanded early if a specified event occurs.
D)nonnegotiable, because the maturity may be extended into the future.

Question 67

On behalf of Bubble Tea Company, Corey signs an instrument in which she promises to deliver 100 cases of tea as payment to Deli Inc. on April 1. This instrument is

A)negotiable.
B)nonnegotiable, because tea is not a medium of exchange authorized or adopted by a government as currency.
C)nonnegotiable, because it does not indicate a specific brand of tea.
D)nonnegotiable, because it does not recite any consideration.

Question 68

Fern has six nieces, ages five to sixteen. She writes an instrument for $50 that states, "Pay to the order of my niece." The 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.

Question 69

On a sheet of paper, Elle writes, without her signature, "I acknowledge that I owe Frank $600, payable out of the proceeds of the sale of my car, a 1995 Honda Civic, which I promise to advertise 'For Sale' next week. Payment is to be made on or before six months from today." What type of instrument is this? Is it negotiable? If not, why not?

Question 70

Oren signs an instrument payable to the order of Pay-Out 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 determined from the face of the instrument.

Question 71

Luc signs a promissory note for $2,500 in favor of Metro College. The note is undated but specifies that it is "payable one month after date." This note is

A)negotiable.
B)nonnegotiable, because one month is not a reasonable time.
C)nonnegotiable, because there is no option to pay early.
D)nonnegotiable, because the maturity date cannot be determined from the face of the instrument.

Question 72

Wen writes an instrument that states it is "payable to X." The instrument is

A)negotiable.
B)nonnegotiable, because it does not state that it is payable to order.
C)nonnegotiable, because it is payable to a nonexistent person.
D)nonnegotiable, because it cannot be transferred by indorsement.