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1
Chapter 25
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. The checks that you wrote are negotiable instruments that act as substitutes for
cash.
B2. All checks are time instruments.
B3. A sight draft may be payable on acceptance.
B4. On a cashier’s check, the drawer is also always the payee.
2 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
B5. On a certificate of deposit, the bank is the maker and the depositor is the
payee.
B6. To be negotiable, an instrument must be in writing.
B7. An instrument is nonnegotiable unless the word “negotiable” is printed on it.
B8. To be negotiable, an instrument cannot be portable.
B9. A symbol can serve as a valid signature.
B10. A signature on a negotiable instrument cannot be made by a device, such as a
rubber stamp or a thumbprint.
B11. With respect to negotiability, the location of a signature on a document is
important.
B12. With respect to negotiability, a mere reference to another writing or record
makes a promise conditional.
CHAPTER 25: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS 3
B13. With respect to negotiability, an order on an instrument may be addressed to
one person or to more than one person, either jointly or alternatively.
B14. To be negotiable, an instrument must be payable in money.
B15. An instrument that promises to pay “in goods” can be negotiable.
B16. To be negotiable, an instrument must be payable on demand.
B17. An extension clause allows a payee or other holder of a time instrument to
demand payment of the entire amount due, with interest, if a certain event
occurs.
B18. A holder is any person in possession of a negotiable instrument that is payable
either to the bearer or to an identified person who is the person in possession.
B19. An order instrument must identify the payee with certainty.
B20. A instrument “payable to the order of bearer” is neither an order instrument nor
a bearer instrument.
4 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
MULTIPLE CHOICE QUESTIONS
B1. On April 1 Richard arranges to buy a sixteen-speed bike from his neighbor Phil
for $500. Phil agrees to deliver the bike on May 1. Richard writes a draft for
$500 payable to Phil on May 1. In this situation, the draft is
a. a certificate of deposit.
b. a time draft.
c. a sight draft.
d. a promissory note.
B2. InterComp normally sells $50,000 worth of software to Power Source, a retail
electronics store, each summer on terms requiring payment in sixty days. One
year, InterComp wants cash, but Power Source wants the usual sixty days. To
meet both needs, the parties can arrange
a. a certificate of deposit.
b. a bearer bond.
c. a trade acceptance.
d. an international letter of credit.
B3. To obtain a business license, Bess writes a check to a certain state agency.
Bess is
a. the drawee.
b. the drawer.
c. the indorser.
d. the payee.
CHAPTER 25: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS 5
B4. Sarah has a checking account at Secure Bank. Sarah buys her roommate
Sophie’s two tickets to a Broadway musical for $200. Sarah writes Sophie a
check for the tickets. In this situation, Secure Bank is
a. the drawee.
b. the indorser.
c. the payee.
d. the drawer.
Fact Pattern 25-1B (Questions B5–B6 apply)
Thalia signs an instrument unconditionally promising to pay to “Union Bank” $7500
with interest in installments with the final payment due June 1, 2017.
B5. Refer to Fact Pattern 25-1B. The instrument that Thalia signed is most likely
a. a certificate of deposit.
b. a draft.
c. an order to pay.
d. a promissory note.
B6. Refer to Fact Pattern 25-1B. With respect to this instrument, Union Bank is
a. the drawee.
b. the indorser.
c. the maker.
d. the payee.
B7. Evermore Bank is both the drawer and the drawee with regard to a draft issued
to Fernando. The draft is
a. a certificate of deposit.
b. a cashier’s check.
c. a nonnegotiable instrument.
d. a promissory note.
6 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
B8. Willy deposits $5,000 with Home State Bank on July 1, 2012. Home State Bank
promises to repay Willy the $5,000 plus 3 percent annual interest on July 1,
2017. This is
a. a certificate of deposit.
b. a cashier’s check.
c. none of the choices.
d. a draft.
B9. To borrow money to finance the start-up of his business, Rollo executes an
instrument in favor of Security 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.
B10. Northwest Energy Corporation signs an instrument that states it is being exe-
cuted “as per contract for a purchase of 4,000 barrels of oil dated September
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.
CHAPTER 25: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS 7
B11. Bart, the owner of Clear Cut Corporation, signs an instrument that includes the
phrase “payment for this note will be made from the proceeds of next year’s
timber 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. Eden signs a promissory note payable to the order of First Mortgage 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 deter-
mined from the face of the instrument.
B13. Brie wants one of Cari’s purebred Dalmations. Brie signs an instrument in
which she promises to pay Jasmine for a puppy. The instrument will be
negotiable if it is payable in
a. goods of equal market value.
b. money.
c. any of the choices.
d. shares of stock.
B14. Grace signs an instrument payable to the order of Hillside Credit Union “on or
before” June 15. This instrument is
a. negotiable.
b. nonnegotiable, because the maker can move up the payment date.
8 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
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. Payday Loans, Inc., signs an instrument payable to the order of Qiana that
states, “The maker of this note at the date of maturity, April 1, 2016, 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. Merry draws a check payable to “Cash” and presents it to National Bank for
payment. This instrument is
a. a bearer instrument.
b. an order instrument.
c. valid but nonnegotiable.
d. void.
B17. Efron borrows money to pay his tuition and signs a note payable to First
Citizens Bank. The bank assigns the note to Guaranty Bank. The assignment
a. does not affect Efron’s obligation to pay the note as promised.
b. frees Efron of the obligation to pay the note.
c. results in Guaranty Bank’s co-liability on the note with Efron.
d. results in Guaranty Bank’s co-liability on the note with First Citizens
Bank.
CHAPTER 25: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS 9
B18. To buy a stuffed cow, Ken executes a check “pay to Laura or bearer” and gives
it to Laura, who does not own a stuffed cow. This check is
a. negotiable.
b. nonnegotiable, because it does not indicate a specific payee.
c. nonnegotiable, because it may be a joke.
d. nonnegotiable, because Laura does not own a stuffed cow.
B19. Trixie signs a $1,500 note payable, at 4.25 percent interest, on October 1 to
Urban 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. Cricket signs a check payable to the order of Discount Warehouse, 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, Clark writes, “I promise to pay Dobie or bearer
$700 on demand. [Signed] Clark.” What type of instrument is this? Is it nego-
tiable? If not, why not?
10 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
B2. Ralph gets his paycheck from Shakes n’ Burgers Restaurant, his employer,
and attempts to deposit it in his account at Town Bank. Uri, 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
Ralph’s account?
