Chapter 29: Commercial Paper
1. The promissory note is the most common form of commercial paper.
2. Banks are debtors of the depositors in relation to checking accounts.
3. An instrument that reads “Pay to the order of Anita Keys after delivery of necklace” is not enforceable as
commercial paper.
4. An IOU is enforceable as commercial paper.
5. Checks can only be written on special forms that are magnetically encoded to simplify check processing for
the banking system.
6. Stop-payment orders are good for six months whether they be oral or written.
7. A promissory note can be paid on demand or at a definite time according to the stated terms on the face of the
note
8. Typically, interest rates on CDs are higher than the rates on savings or checking accounts.
9. A cashier’s check is a personal check that has been accepted by a bank before payment.
10. Persons who do not have checking accounts use letters of credit.
11. Unconditional written orders or promises to pay money are collectively defined as
C. drafts.
D. IOUs.
12. An unconditional written order by one person that directs another person to pay money to a third party is
called a(n)
C. IOU.
D. note.
13. A draft that is due and payable at the time it is presented to the drawee by the person holding it is a
A. demand draft.
B. promissory draft.
14. A type of draft by which a bank depositor orders the bank to pay money on demand usually to a third party
is a
C. note.
D. money order.
15. A person who executes a promissory note is the
A. drawee.
B. drawer.
16. When personal property is offered as security and is so identified on the face of the note, the paper is a
C. promissory note.
D. none of these.
17. A check that a bank draws on itself is a
C. teller’s check.
D. traveler’s check.
18. A draft drawn by a bank on funds that it has on deposit at another bank is a
A. cashier’s check.
B. certified check.
19. Specialized types of commercial paper used in international transactions are
C. traveler’s checks.
D. teller’s checks.
20. Checks may be written on
A. blank paper.
B. rawhide.
21. Which of the following statements helps explain why CDs and other long-term notes are a good value for
either the bank or the individual purchasing such instruments?
A. Individuals earn higher interest on them compared with interest earned on regular savings or checking
accounts.
B. The bank can be sure the money will be available to loan for a long period of time.
22. An example of an instrument bearing an unconditional promise to pay is a(n)
C. draft.
D. none of the above.
23. When Sandy prepares a bill of exchange she is directing that money be paid to another person. Which of the
following statements is true concerning such an instrument?
A. The “other person” could be an “artificial” person.
B. A bill of exchange could be made payable to “cash” or “bearer.”
24. Which of the following is not commercial paper?
A. check
B. promissory note
25. Trudy just opened a checking account. Which statement is true regarding the checks in Trudy’s checking
account?
C. They are a type of promissory note.
D. All of the above are true.
26. Which of the following statements is true?
A. The drawee issues a draft.
B. A promissory note is payable to the maker.
27. Which of the following statements is not true regarding a cashier’s check?
C. The bank is the drawer of a cashier’s check.
D. All of the above statements are not true statements regarding a cashier’s check
28. Which of the following statements is true?
C. A standby letter of credit is a type of commercial paper only used for domestic transactions.
D. None of these statements is true.
29. The party ordered by the issuer to pay a draft is the
A. draftee.
B. drafter.
30. Which of the following items of property would be security for a mortgage note?
C. government savings bonds
D. business inventory
31. Most of the laws governing the legitimacy and use of commercial paper are found in the
____________________.
32. ____________________, as used in the definition of commercial paper, means that the legal effectiveness
of the order or promise does not depend on any other event.
33. The drawee’s promise to pay the draft when due is termed the ____________________.
34. The direction given to the bank not to pay a lost or stolen check is termed a(n) ____________________.
35. A(n) ____________________ is an instrument bearing a bank’s written acknowledgment of the receipt of
money, together with an unconditional promise to repay it at a definite future time.
36. At the time of certification of a certified check, the bank draws funds from the ____________________
account and sets them aside in a special account in order to pay the check when it is presented.
37. A(n) ________________ is a draft issued by a post office, bank, express company, telegraph company, or
other authorized private entity. It is drawn by the issuer on itself and made payable as the purchaser directs,
typically to a creditor of the purchaser.
38. A draft drawn by a bank on funds that it has on deposit at another bank is a(n) ____________________.
39. If a draft is payable on a set date, at the end of a specified period after sight, or at the end of a specified
period after the date of the draft, it is a(n) ____________________ draft.
40. An IOU is not commercial paper but is merely a(n) ____________________ of a debt.
41. Ted wouldn’t get paid until Monday. He just had enough money in his account to pay his credit card bill,
which was due Friday, but he still needed groceries. He decided to mail a check for the credit card payment on
Thursday so the postmark would indicate that the payment was not late. Then, to get groceries, he would write a
check on the money that would, because of his use of the mail to pay the credit card bill, still be in his account.
The mailed check should not clear the bank before Tuesday, and by that time he will have been paid and made a
deposit. Is this legal? Explain your answer.
42. Candi works at the Aguilar Insurance Agency on a part-time basis issuing agents’ commission checks and
paying Mr. Aguilar’s bills and other expenses. Last Saturday she wrote a check to William Newman in the
amount of $15,000 and placed it in the mail. She did not realize, however, that Mr. Newman had been fired on
the previous day, and Mr. Aguilar had paid him cash for the commissions he had earned up to that time. On
Monday when Mr. Aguilar discovered the error, he called his bank and issued an oral stop-payment order on
Mr. Newman’s commission check. One week later he sent in to the bank a written stop-payment order on the
same check. Nine months later, however, Mr. Newman cashed the check at Mr. Aguilar’s bank. Who is liable
for the amount of the check? Did Mr. Newman commit a crime?
Mr. Aguilar’s oral stop-payment order was only good for 14 days, so he then issued a written stop-payment