Deck 13: Negotiable Instruments, Credit, and Bankruptcy

Question 1

If a commercial instrument is nonnegotiable, it falls under the common law, not the UCC.

Answer 1

True

Question 2

If an instrument is negotiable under the UCC, the instrument may be freely traded in the market place without concern for any existing contract responsibilities, so long as the instrument is in the possession of a holder in due course.

Answer 2

True

Question 3

Although commercial paper may be negotiable or non-negotiable, a dispute could be resolved differently depending on whether the instrument is categorized as negotiable or non-negotiable.

Answer 3

True

Question 4

Negotiable instruments began many years ago as a written promise or order to pay a certain sum of money.

Question 5

To be ordinary holder of a negotiable instrument, the holder must give value for it, take it without knowledge that it is overdue or defective, and must take it in good faith.

Question 6

A negotiable instrument is a promise by one party to pay a undefined sum of money to another party. There are two parties: the maker and the payee. While the amount to be paid may vary, the date of payment must be set at a specific time in the future.

Question 7

Historically, promises to pay a debt owed were allowed to be assigned to a third party, but were usually done so at a discount.

Question 8

To meet the UCC's requirements for negotiability, an instrument must be in writing.

Question 9

Before the UCC, negotiable instruments could not be bought or sold.

Question 10

Negotiable instruments are important to business because they allow for the orderly creation and transfer of rights to the payment of money.

Question 11

To meet the UCC's requirements for negotiability, an instrument must be payable to a specific party.

Question 12

To meet the UCC's requirements for negotiability, an instrument must state a specific sum of money.

Question 13

Not all promises to pay are negotiable instruments.

Question 14

A negotiable instrument may be transferred in two basic ways. If the instrument is made "to the order" of the payee, the payee must (1) endorse the instrument and (2) deliver the instrument to a third party. If the instrument is made "to bearer," the party in possession of the instrument is required only to deliver it to transfer it.

Question 15

Negotiable instruments payable "to bearer" are considered the safest form.

Question 16

To meet the UCC's requirements for negotiability, an instrument must be an unconditional oral promise to pay.

Question 17

In countries under Islamic law, financial instruments have been invented to avoid the restrictions on interest rates, but have much the same effect.

Question 18

The person who has a negotiable instrument may be either a holder in due course or an ordinary holder.

Question 19

The maker or the drawer may create a bearer instrument by using the following language: "to bearer" or "to the order of bearer."

Question 20

Once issued, a negotiable instrument can be transferred by assignment or by negotiation to another party.

Question 21

The party who issues or creates a document that requests payment, probably from a bank, is called the drawer.

Question 22

The drawer owes money to the drawee in a negotiable instrument.

Question 23

When real estate is used to back up a note, it is called a collateral note.

Question 24

Orders to pay include notes and certificates of deposit.

Question 25

Promises to pay include notes and certificates of deposit.

Question 26

Under Article 3 of the UCC, a note is a promise by one party to pay a certain sum of money to another party. Two parties are involved: the maker and the payee. Payment may be set at some time in the future.

Question 27

Under Article 3 of the UCC, a check is an unconditional written order to pay that involves three parties in distinct capacities: drawer, drawee, and payee. The drawee must be a bank. Payment must be "on demand."

Question 28

A check is a draft drawn on a bank and payable on demand.

Question 29

The party who agrees to make a payment to another party, based on a document presented to it, such as a bank, is called the drawer.

Question 30

Promises to pay include drafts and checks.

Question 31

A note involves two parties, the maker and the payee. Payment must be on demand.

Question 32

Orders to pay include drafts and checks.

Question 33

When the maker of a note promises to repay the note at specific dates over time, it is called an installment note.

Question 34

A cashier's check is a form of check in which the bank is both the drawer and the drawee.

Question 35

When personal property is used to back up a note, it is called a collateral note.

Question 36

The party to receive a payment from a negotiable instrument is called the payee.

Question 37

The party who issues or creates a document that requests payment, probably from a bank, is called the drawee.

Question 38

The drawee owes money to the drawer in a negotiable instrument.

Question 39

For a check, the bank is the drawee.

Question 40

The party who agrees to make a payment to another party, based on a document presented to it, such as a bank, is called the drawee.

Question 41

Collateral is the one term in a debt instrument that always must be specified.

Question 42

The amount of money owed in a debt is called the principal.

Question 43

A bill of exchange is a draft that guarantees payment for goods in international trade.

Question 44

When the payee is concerned about the quality of a draft, it may be submitted to the drawee for confirmation. That is called an acceptance or bankers' acceptance.

Question 45

Under Article 3 of the UCC, a draft is a conditional promise to pay that involves three parties in distinct capacities: drawer, drawee, and payee.

Question 46

General economic conditions at the time a loan is made will be taken into account in setting credit standards.

Question 47

If a draft is sold to another party before it comes due, it is discounted.

Question 48

The party who borrows money (gets credit) is called the creditor.

Question 49

Banks provide credit information about customers, but by law it may only be about their checking accounts.

Question 50

Credit terms for debtors must include the payment dates of the debt.

Question 51

An acknowledgment by a bank that it has received money from a customer with a promise by the bank that it will repay the money received at a specified date is a certificate of deposit.

Question 52

A balloon note has one large payment up front then a series of smaller payments over time.

Question 53

Certificates of deposit are not negotiable because they are specific contracts between banks and payees.

Question 54

Only individuals may purchase credit reports.

Question 55

In a term draft or time draft, the promise to pay expires in the future, usually 60 or 90 days.

Question 56

Smaller businesses tend to rely more on equity financing for financial backing.

Question 57

A bank is the maker of a certificate of deposit.

Question 58

In a draft, the drawee is the party ordered to pay a certain sum of money to a third party.

Question 59

An acknowledgment by a bank that it has received money from a customer with a promise by the bank that it will repay the money received at a specified date is a note.

Question 60

When the maker of a note promises to repay the note in specific installments over time, it is a balloon note.

Question 61

A creditor may be secured by operation of the law only, all other means of securing loans are not enforceable.

Question 62

In General Electric Business Financial Services v. Silverman, where Silverman and his partners guaranteed a loan made to a partnership that defaulted on the loan, the court held that the partners were liable on the loan.

Question 63

Open accounts usually require full payment within a fixed time period.

Question 64

A guarantor is the same as a surety.

Question 65

A general creditor usually collects nothing in the event the debtor defaults on the debt and is insolvent.

Question 66

In a suretyship arrangement, the person borrowing the money is known as the principal.

Question 67

The law governing secured loans for personal property is found in Art. 2 of the UCC.

Question 68

Consumer credit accounts are often installment accounts.

Question 69

If you sign a personal promissory note to cover debts owed by your business and the business fails, you will be held personally liable on the debt.

Question 70

One of the most common defenses a surety may raise is that material changes were made to the debt contract, thus releasing the surety.

Question 71

A suretyship is a guarantee by the debtor that he will repay his loans.

Question 72

An open account is the least common form of business credit account.

Question 73

A revolving account requires the debtor to pay in full within a fixed time period.

Question 74

To be enforceable, a security interest must be detached from the debtor.

Question 75

Trade associations may provide information about the credit experience of their members.

Question 76

A customer who is insolvent is able to make only partial payments on credit accounts.

Question 77

A secured creditor is one is able to take a non-paying customer's property to satisfy the customer's debt.

Question 78

A general creditor is also referred to as an unsecured creditor.

Question 79

The first step in the collection process is typically a visit from the creditor's attorney.

Question 80

A general creditor usually collects on a debt owed by an insolvent debtor by taking collateral from the debtor to sell for debt payment.