Business Law, 8e (Cheeseman)
Chapter 22 Creation of Negotiable Instruments
1) Article 3 of the UCC governs the use of negotiable instruments.
2) The primary benefit of a negotiable instrument is that it can be used as a substitute for money.
3) The issuance of a negotiable instrument is known as negotiation.
4) Negotiable instruments help in creating a credit economy.
5) Acceptances for drafts can be done orally.
6) In a draft transaction, the payee is called the acceptor of the draft.
7) In a draft transaction, the payee or the drawer is allowed to freely transfer drafts as a
negotiable instrument to another party.
8) A bill of exchange is a type of sight draft.
9) A trade acceptance is a two-party transaction.
10) A check is a type of promissory note.
11) The financial institution upon which the check is written is the payee of a check.
12) A promissory note is a two-party transaction.
13) Promissory notes are not paid on demand.
14) Security posted by promissory note maker to the lender for repayment of money is known as
collateral.
15) Notes cannot be named after the security that underlies the note.
16) A certificate of deposit is an order to pay.
17) In a certificate of deposit, the depositor is the payee.
18) In order to be considered valid, a negotiable instrument need not state a fixed amount of
money.
19) If the payee of the instrument is not mentioned on the face of the instrument, it is considered
nonnegotiable.
20) A negotiable instrument should be in writing in order to be considered valid.
21) The UCC signature requirement indicates that a negotiable instrument must be signed by the
drawer if it is a certificate of deposit.
22) Trade names or assumed names cannot be used for signing negotiable instruments.
23) Rubber-stamps are not recognized as signing instruments under the UCC.
24) A maker or drawer can appoint an agent to sign a negotiable instrument on his or her behalf.
25) To be negotiable, a draft or check must contain the drawer’s unconditional order to pay a
payee.
26) An acknowledgement of debt is sufficient to consider a promissory note as a negotiable
instrument.
27) A conditional promise is not a negotiable instrument.
28) A promise or an order becomes conditional if it refers to a different writing for a description
of rights to collateral, prepayment, or acceleration.
29) Promises to pay and orders to pay must be unconditional in order to be negotiable.
30) An order instrument is payable to anyone in physical possession of the instrument and
presents it for payment when it is due.
31) To qualify as a negotiable instrument, a promise cannot state any other undertaking by the
person promising other than the payment of money.
32) Instruments that are payable on demand are called order instruments.
33) Instruments that are payable upon an uncertain act or event are not negotiable.
34) An acceleration clause permits the maker to pay the amount due prior to the due date of the
instrument.
35) A prepayment clause allows the payee or holder to accelerate payment of the principal
amount of an instrument.
36) An extension clause allows the date of maturity of an instrument to be extended to sometime
in the future.
37) A negotiable instrument can be honored with payment of non-monetary items.
38) ________ are a special form of contract that satisfies the requirements established by
Revised Article 3 of the UCC.
A) Banknotes
B) Negotiable instruments
C) Letters of credit
D) Stocks
39) ________ of the UCC is a model code that establishes rules for the creation of, transfer of,
enforcement of, and liability on negotiable instruments.
A) Article 5
B) Article 3
C) Article 2
D) Article 2A
40) Which one of the following would be a three-party transaction?
A) a promissory note
B) a certificate of deposit
C) an ordinary lease
D) a draft
41) A ________ is a three-party instrument that is an unconditional written order by one party
that orders a second party to pay money to a third party.
A) draft
B) promissory note
C) certificate of deposit
D) lease
42) Who is the drawee in a draft transaction?
A) The party that demands the draft.
B) The party who pays the money stated in a draft.
C) The party who writes an order for a draft.
D) The party who receives the money from a draft.
43) A ________ is a type of draft that is always paid at a future date.
A) sight draft
B) bill of exchange
C) time draft
D) demand draft
44) Which of the following is true about a draft?
A) It is always a two-party transaction.
B) It is an unconditional written promise to pay.
C) It is a note created upon deposition of money.
D) It is a pay to order transaction.
45) Who is the acceptor of a draft in a draft transaction?
A) the drawer
B) the drawee
C) the payee
D) the financee
46) A sight draft that arises when credit is extended by a seller to a buyer with the sale of goods
is known as a ________.
A) check
B) time draft
C) trade acceptance
D) demand draft
47) Which of the following is true about a trade acceptance?
A) The buyer is the payee.
B) The seller is both the drawer and payee.
C) The draft is countersigned by the drawee’s bank.
D) The draft is only as good as the drawer’s creditworthiness.
48) What is the similarity between a demand draft and a trade acceptance?
A) both are examples of sight drafts
B) both require credit to be extended to the buyer
C) both have the drawer to be the payee as well
D) both are considered two-party transactions
49) A ________ is a distinct form of draft drawn on a financial institution and payable on
demand.
A) promissory note
B) check
C) deed
D) letter of credit
50) Who is the drawee of a check?
A) The drawer of the check is also its drawee.
B) The financial institute where the drawer has an account.
C) The party to whom a check is written.
D) The financee to whom the check is drawn.
51) Which of the following is considered as a distinction of a check?
A) It always draws its money from a financial institute.
B) It is created when credit is extended to a buyer by a seller.
C) It is a two-party instrument.
D) It is an unconditional written promise to pay.
52) A ________ is a two-party negotiable instrument that is an unconditional written pledge by
one party to pay money to another party.
A) bill of exchange
B) check
C) certificate of deposit
D) promissory note
53) Which of the following is true about a promissory note?
A) It is a three-party transaction.
B) It is not an order to pay.
C) The party who makes the promise is the lender.
D) The payee cannot transfer a note to a third party.
54) If a promissory note is secured by a piece of real estate, then the note is called a(n)
________.
A) collateral note
B) mortgage note
C) demand note
D) installment note
55) A two-party negotiable instrument that is a special form of note created when a person
deposits money at a financial institution in exchange for the institution’s promise to pay back the
amount of the deposit plus an agreed-upon rate of interest upon the expiration of a set time
period agreed upon by the parties is known as a ________.
A) collateral note
B) check
C) certificate of deposit
D) bill of exchange
56) Which of the following is true about a certificate of deposit?
A) It is a promise to pay.
B) It is used to extend credit to a buyer.
C) It is a three-party instrument.
D) It can be made to pay on demand.
57) Which of the following statements is true for a negotiable instrument?
A) It should be signed by the payee.
B) It need not state a fixed amount of money.
C) It should not require any undertaking other than the payment of money.
D) It can be either written or oral.
58) Which of the following is a fundamental requirement for a negotiable instrument?
A) that it must be supplemented with interest upon payment
B) that it must be secured with collateral
C) that it must contain a drawer, drawee, and a payee
D) that it must be in a permanent state
59) The ________ requirement of negotiable instruments says that negotiable instruments must
be able to be easily transported between areas.
A) portability
B) permanence
C) signature
D) transparency
60) The UCC signature requirement indicates that a negotiable instrument must be signed by
________.
A) a witness
B) the maker or drawer
C) the drawee
D) the financee
61) Once an appointed authorized representative signs a negotiable instrument, while
unambiguously disclosing his or her agency status, and the identity of the maker or drawer, then,
________.
A) the authorized agent becomes personally liable to pay for the negotiable instrument
B) the signature binds the maker or drawer of the negotiable instrument to the instrument
C) the agent cannot sign another negotiable instrument until this instrument’s transaction is
complete
D) the agent is obligated with secondary liability to the instrument
62) Which of the following must a promissory note contain to make it negotiable?
A) an acknowledgement of debt
B) an implied promise to pay
C) an unconditional affirmative to pay
D) a promise to negotiate
63) A(n) ________ is an exception in promissory notes, as it does not require the maker’s
unconditional and affirmative promise to pay.
A) trade acceptance
B) collateral note
C) remittance advice
D) certificate of deposit
64) A promise or order is only considered negotiable if ________.
A) the promise or order to pay is unconditional
B) it states that the promise or order is subject to or governed by another writing
C) the rights to the promise or order are stated in another writing
D) an express condition to payment is mentioned
65) A(n) ________ is type of instrument that is payable to anyone in physical possession of the
instrument and presents it for payment when it is due.
A) certificate of deposit
B) order instrument
C) bearer instrument
D) check
66) Which of the following is true of a bearer paper?
A) It will mention a specific person as payee.
B) It will not specify a payee.
C) It will contain the term “payable to the order of.”
D) It will contain an additional undertaking besides the payment of money.
67) A(n) ________ is a clause in an instrument that allows the payee or holder to quicken
payment of the principal amount of the instrument, plus accrued interest, upon the occurrence of
an event.
A) acceleration clause
B) prepayment clause
C) extension clause
D) forestallment clause
68) A clause in an instrument that allows the date of maturity of the instrument to be prolonged
to sometime in the future is referred to as the ________.
A) forestallment clause
B) acceleration clause
C) prepayment clause
D) extension clause
69) A(n) ________ is a clause in an instrument that permits the maker to pay the amount due
prior to the date of the instrument.
A) prepayment clause
B) acceleration clause
C) extension clause
D) forestallment clause
70) Which of the following is true for the validity of the new promissory note made by Roger?
A) It must contain interest on the old principal to become a valid instrument.
B) It must contain a specific date or time to be considered valid.
C) It is a nonnegotiable instrument.
D) It is a negotiable instrument if Jax accepts it.
71) What kind of promissory note did Jax secure from Roger for the original amount?
A) a collateral note
B) a mortgage note
C) an installment note
D) a time note
72) Which of the following clause did Roger ask to add in the first promissory note?
A) prepayment clause
B) acceleration clause
C) extension clause
D) forestallment clause
73) In which of the following ways will the prepayment clause help Jill?
A) It helps Jill to shorten the repayment period when she wishes.
B) It helps Jill acquire the whole amount in one payment incase Mike defaults.
C) It allows Mike to repay earlier than the stipulated time.
D) It obligates Mike to pay interest on the money he defaults.
74) What kind of promissory note has Jill and Mike decided on?
A) a time note
B) a bearer’s note
C) a mortgage note
D) an installment note
75) Mike deposited $100,000 in a bank and procured a certificate of deposit on it, payable to
himself, and for repayment in 5 years with a 5 percent interest rate. A year after that, Mike
borrows $25,000 from Jill, and gives her a promissory note to repay it in one year. As collateral,
Mike gave Jill the certificate of deposit and asked to put in a prepayment clause to which Jill
agreed. They mutually agreed that Mike could repay in monthly payments, as mentioned it in the
note.
If Mike defaults on the payment even after one year, which of the following is true of the
foreclosure options Jill has with the certificate of deposit Mike gave her?
A) The bank has to pay her only after the five-year period mentioned in the CD.
B) The bank does not have to pay her for the CD.
C) The bank has to pay her the difference of $75,000.
D) The bank has to pay her $25,000 with one year interest at 5 percent on demand.
76) List out the functions of a negotiable instrument.
77) What is a trade acceptance?
78) How does an authorized representative’s signature work for negotiable instruments?
79) Give an account of the requirement for a fixed amount in negotiable instruments?
80) What are nonnegotiable contracts?