Chapter 24
The Function and Creation of Negotiable
Instruments
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
B1. A negotiable instrument can function as an extension of credit.
B2. A trade acceptance is a promissory note.
B3. A sight draft is payable on sight.
B4. On a cashier’s check, the drawer is also the drawee.
B5. An instrument that is “payable on presentment” is payable on demand.
B6. A certificate of deposit represents a loan by its owner to a bank.
B7. An instrument is nonnegotiable unless the word “negotiable” is printed on it.
B8. To be negotiable, an instrument cannot be portable.
B9. A trade name can serve as a valid signature.
B10. A signature on a negotiable instrument must be made manually.
B11. To be negotiable, an instrument must be signed in the lower right-hand corner.
B12. A mere acknowledgment of a debt is not sufficient to create a negotiable instrument.
B13. An order stating “please pay” is too courteous to create a negotiable instrument.
B14. A conditional promise to pay is not a negotiable instrument.
B15. To be negotiable, an instrument must be payable in money.
B16. An instrument that promises to pay “in goods” can be negotiable.
B17. To be negotiable, an instrument must be payable on demand or at a definite time.
B18. An extension clause allows the date of maturity of an instrument to be extended into
the future.
B19. A instrument “payable to the order of bearer” is neither an order instrument nor a
bearer instrument.
B20. An order instrument must identify the payee with certainty.
MULTIPLE CHOICE QUESTIONS
Fact Pattern 24-1B (Questions B1–B2 apply)
Dominion Sales Ltd. in Canada and Eagle Buying Company in the United States enter a
contract for a sale of forestry products. Dominion draws a draft unconditionally ordering
Great Federal Bank, Eagle’s bank, to pay $60,000 to Dominion’s order in sixty days. Eagle
signs and dates the draft.
B1. Refer to Fact Pattern 24-1B. This instrument is
a. a banker’s acceptance.
b. a nonnegotiable instrument.
c. a promissory note.
d. a trade acceptance.
B2. Refer to Fact Pattern 24-1B. With respect to this instrument, Dominion is
a. the banker.
b. the maker.
c. the payee.
d. the trader.
B3. Beck draws a check payable to “County Farm Supply” to buy a quantity of fertilizer to
deposit in Beck’s field. This check is
a. a certificate of deposit.
b. a draft.
c. a promise to pay.
d. a promissory note.
Fact Pattern 24-2B (Questions B4–B5 apply)
Ewa signs an instrument unconditionally promising to pay to “Sunny State Bank” $5,000 with
interest in installments with the final payment due June 1, 2013.
B4. Refer to Fact Pattern 24-2B. The instrument that Ewa signed is most likely
a. a certificate of deposit.
b. a draft.
c. an order to pay.
d. a promissory note.
B5. Refer to Fact Pattern 24-2B. With respect to this instrument, Sunny States Bank is
a. the drawee.
b. the drawer.
c. the maker.
d. the payee.
B6. Rupert owes $5,000 in unpaid taxes. Using the back of an old t-shirt, he executes an
instrument for $5,000 that otherwise meets the requirements for negotiability. This
instrument is most likely
a. negotiable.
b. nonnegotiable, because an instrument must be on paper.
c. nonnegotiable, because a t-shirt is not sufficiently permanent.
d. nonnegotiable, because the government does not appreciate it.
B7. Gladys, the chief executive officer of Home Electrical, Inc., signs an instrument by
using a rubber stamp with her thumbprint on it. This instrument is
a. negotiable.
b. nonnegotiable, because a rubber stamp does not identify the signer.
c. nonnegotiable, because a thumbprint implies a lack of serious intent.
d. nonnegotiable, because a thumbprint is not a signature.
B8. To borrow money to finance the start-up of his business, Buck executes an instrument
in favor of City Bank. For the instrument to be negotiable, the signature must be
a. anywhere on the instrument.
b. anywhere on the lower half of the instrument only.
c. in the lower left-hand corner of the instrument only.
d. in the lower right-hand corner of the instrument only.
B9. International Properties, Inc. (IPI), signs an instrument in favor of Financial
Investments Corporation that includes the statement “IPI plans to pay this debt from
the proceeds of the sale of the IPI Office Building in Montreal.” This instrument is
a. negotiable.
b. nonnegotiable, because banks cannot easily process office buildings.
c. nonnegotiable, because it refers to a separate sale.
d. nonnegotiable, because Montreal is in Canada, not the United States.
B10. USA Oil Corporation signs an instrument that states it is being executed “as per
contract for a purchase of 4,000 barrels of oil dated May 1.” This instrument is
a. negotiable.
b. nonnegotiable, because information about the sale must be obtained from
another source.
c. nonnegotiable, because it states an express condition to payment.
d. nonnegotiable, because the terms of the contract are not clear on the face of
the instrument.
B11. Kevin, the owner of Livestock Ranch Corporation, signs an instrument that includes
the phrase “payment for this note will be made from the proceeds of next year’s stock
sale.” This instrument is
a. negotiable.
b. nonnegotiable, because payment can be made only out of a particular source.
c. nonnegotiable, because it states an express condition to payment.
d. nonnegotiable, because the reasons for the note are not clear on its face.
B12. Olena 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 specify a rate of interest.
c. nonnegotiable, because it is payable with interest.
d. nonnegotiable, because the exact amount payable cannot be determined from
the face of the instrument.
B13. On behalf of Equity Capital, Inc., Flip signs an instrument promising to pay $5,000 in
gold to Growth Investments, Inc., on May 15. This instrument is
a. negotiable.
b. nonnegotiable, because gold is not a medium of exchange authorized or
adopted by a government as currency.
c. nonnegotiable, because it does not recite any consideration.
d. nonnegotiable, because it is for an amount of $500 or more.
B14. Daria signs an instrument payable to the order of Employees Credit Union “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.
B15. EZ Credit Company signs an instrument payable to the order of Fraser that states,
“The maker of this note at the date of maturity, May 1, 2013, can extend the time of
payment, but for no more than a reasonable time.” This instrument is
a. negotiable.
b. nonnegotiable, because it includes an extension clause.
c. nonnegotiable, because it is not payable within a definite time.
d. nonnegotiable, because it is payable to a specific payee.
B16. Tyrone draws a check payable to “Cash” and presents it to Urban Bank for payment.
This instrument is
a. a bearer instrument.
b. an order instrument.
c. valid but nonnegotiable.
d. void.
B17. Wilbur signs a note that includes a clause under which the note’s holder can delay the
date of its payment indefinitely. This is
a. an acceleration clause.
b. an extension clause.
c. an immaturity clause.
d. a stop-payment clause.
B18. Will signs a check payable to “cash” and gives it to Yves. This check is
a. negotiable.
b. nonnegotiable, because it does not indicate a specific payee.
c. nonnegotiable, because it is not signed by the payee.
d. nonnegotiable, because “Yves” is not “cash.”
B19. Rye signs a $1,000 note payable, at 6 percent interest, on May 1 to Suburban Bank
and writes on its face that it is “nonnegotiable.” This note is
a. negotiable.
b. nonnegotiable, because it is dated.
c. nonnegotiable, because it is payable with interest.
d. nonnegotiable, because it includes the notation “nonnegotiable.”
B20. Julie signs a check payable to the order of Kwik Mart Stores, Inc., that does not include
a date. This check is
a. negotiable.
b. nonnegotiable, because it does not include a date.
c. nonnegotiable, because it is payable to a corporation.
d. nonnegotiable, because it is signed by the drawer.
ESSAY QUESTIONS
B1. 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?
B2. Donna gets her paycheck from Erstwhile Financial Services, Inc., her employer, and
attempts to deposit it in her account at First National Bank. Grey, the bank’s teller,
notices that on the check the amount stated in words is different from the amount
stated in numerals. Which amount can the bank lawfully credit to Donna’s account?
