1
Chapter 28
Banking in the Digital Age
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. Checks are usually three party instruments.
B2. A check is a special type of draft that is drawn on a bank, ordering the bank to
pay a fixed amount of money on demand.
B3. If a bank wrongfully dishonors a cashier’s check, a holder can recover only the
amount of the check.
B4. When a customer makes a deposit, the customer becomes a creditor, and the
bank a debtor, for the amount deposited.
2 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
B5. The bank is liable to the payee or the holder of check in a civil suit if a check is
dishonored for insufficient funds.
B6. A bank may not charge a postdated check against a customer’s account unless
the customer notifies the bank, in a timely manner, to pay the check before the
stated date.
B7. When receiving a stale check for payment, a bank has no option but to pay the
check.
B8. Even if the bank pays a check in spite of a stop-payment order, the bank will
not be obligated to recredit the customer’s account.
B9. If a bank pays a check in spite of a stop-payment order, the bank is liable only
for amount of the actual loss suffered by the drawer because of the wrongful
payment.
B10. A stop-payment order is an order by a customer to his or her bank not to pay a
certain check.
B11. A bank may contractually shift to the customer the risk of forged checks
created electronically or by the use of nonmanual signatures.
CHAPTER 28: BANKING IN THE DIGITAL AGE 3
B12. A forged signature on a check has no legal effect as the signature of a drawer.
B13. A customer who fails to report a forged signature within thirty days from the
date that the bank statement showing the item was made available for
inspection loses the legal right to have the bank recredit his or her account.
B14. In every situation involving a forged drawer’s signature or an alteration, a bank
must observe reasonable commercial standards of care in paying on a
customer’s check.
B15. Banks must pay interest based on the full balance of a customer’s interest–
bearing account on the day the bank posts the interest.
B16. Financial institutions that exchange digital images of checks must also send the
original paper checks.
B17. Check 21 requires banks to change their current check-collection practices.
B18. If a customer’s debit card is lost or stolen and used without his or her
permission, the customer shall be required to pay no more than $50 in any
event.
4 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
B19. Few laws directly apply to the security of e-money payment information and e–
money issuers’ financial records.
B20. If a person does not consent, a federal agency normally must obtain a warrant
to access his or her financial records.
MULTIPLE CHOICE QUESTIONS
B1. Albert buys a surround sound system from his neighbor George at George’s
garage sale. Albert writes George a check for $250 for the sound system.
George is
a. the certifier.
b. the drawee.
c. the drawer.
d. the payee.
B2. Martha has a checking account with Homeplace Bank. Martha signs a check
“payable to Phillipa” drawn on Martha’s account. Homeplace Bank is
a. the payer.
b. the drawee.
c. the drawer.
d. the payee.
B3. Brendan signs a check “pay to the order of City College Bookstore” drawn on
his account in Delta Bank to pay for his current semester’s textbooks. The
bookstore deposits the check in its account in Eagle Bank. Like most checks,
this check is
a. a one-party instrument.
CHAPTER 28: BANKING IN THE DIGITAL AGE 5
b. a nonnegotiable instrument.
c. a special type of draft.
d. not a substitute for cash.
B4. Oscar buys a new HD TV from Priceless Retail Mart, using the means that
accounts for more retail payments than any other. This means of payment is
a. a cashier’s check.
b. a debit card.
c. a personal check.
d. digital cash.
B5. Fredrik signs a check “pay to the order of Gennifer” drawn on Fredrik’s account
in Harborside Bank to buy Gennifer’s jet ski. Fredrik asks the bank to indicate
on the face of the check that it will accept it when Gennifer presents it for
payment. If the bank agrees, this will be
a. a cashier’s check.
b. a certified check.
c. a teller’s check.
d. a traveler’s check.
B6. Amelia writes a check to Barry on her account at Community Savings Bank.
The bank dishonors the check even though Amelia has sufficient funds in her
account. The bank is
a. liable to Amelia.
b. liable to itself.
c. liable to the payee on Amelia’s next check.
d. not liable.
6 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
B7. Cleo writes a check for $100 drawn on Debit & Credit Bank and presents it to
Elegant Jewelers for payment. If the check is not backed by sufficient funds,
Cleo may be prosecuted for
a. forgery.
b. fraud.
c. negligence.
d. nothing.
Fact Pattern 28-1B (Questions B8 and B9 apply)
Dana takes her car to Efficient Auto Repair Service, which repairs the car and bills
Dana for $500. She writes out a check drawn on First Choice Bank, but later,
believing that Efficient Auto did not repair the car properly, issues a stop-payment
order.
B8. Refer to Fact Pattern 28-1B. If First Choice pays the check, the bank
a. can sue Dana for a wrongful stop-payment order.
b. can sue Efficient Auto for breach of contract.
c. is liable to Efficient Auto for the time and trouble to return the payment.
d. is liable for Dana’s loss due to the wrongful payment.
B9. Refer to Fact Pattern 28-1B. First Choice
a. is liable to Efficient Auto for the amount of the check.
b. must stop payment if First Choice has a reasonable time to act.
c. need not follow Dana’s order because it was issued after the check.
d. need not follow Dana’s order unless the check was certified.
B10. Shakira issues a check drawn on Thrifty Bank to Ranch & Farm Supply to pay
for a rototiller. Later, Shakira discovers a defect in the device and orders Thrifty
to stop payment on the check. Shakira does not renew the order, and the bank
clears the check eight months later. The bank
a. must recredit Shakira’s account.
CHAPTER 28: BANKING IN THE DIGITAL AGE 7
b. must obtain funds from Ranch & Farm to cover the check.
c. must substitute acceptable goods.
d. need not recredit Shakira’s account.
B11. Valley Bank retains the cancelled checks of its customers. Valley must be able
to provide customers with legible copies of checks paid for
a. one year.
b. five years.
c. seven years.
d. nine years.
B12. Kenyon steals one of Lavender’s checks and forges her signature. Lavender’s
bank, Metro Bank, pays the check. Lavender can recover from
a. Kenyon, but not Metro Bank.
b. Metro Bank, which cannot recover from Kenyon.
c. Metro Bank, which can recover from Kenyon.
d. no one.
B13. Flores forges Grendel’s signature on a check “payable to the order of Flores”
drawn on Grendel’s account in Harbortown Bank. Most likely, if the bank pays
the check
a. the Federal Reserve will reimburse all parties for their costs.
b. Grendel and the bank will each suffer half of the amount of the loss.
c. Grendel will be liable for the amount.
d. the bank will have to recredit Grendel’s account.
B14. Dru signs a check “pay to the order of Eppie” drawn on Dru’s account in First
State Bank. Greta forges Eppie’s indorsement. First State pays the check. Most
likely
8 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
a. Dru will be liable for the amount.
b. Eppie will have to pay Dru for the amount.
c. First State will have to recredit Dru’s account.
d. the Federal Reserve will reimburse all parties for their costs.
B15. On Monday, Foster deposits in his account at Guaranty Bank a local check for
$500. After 5:00 P.M. on Friday, from these funds, Foster can withdraw no more
than
a. $100.
b. $400.
c. $500.
d. $600.
Fact Pattern 28-2B (Questions B16–B18 apply)
Belle draws a check on her account in Capital Credit Bank in New York, payable to
Distribution Marketing, Inc., in San Francisco. Distribution Marketing deposits the
check in its account at Equity Bank. Equity Bank deposits the check in the Federal
Reserve Bank of San Francisco, which transfers it to the Federal Reserve Bank of
New York. That Federal Reserve Bank sends the check to Capital Credit.
B16. Refer to Fact Pattern 28-2B. Central City, Distribution Marketing’s bank, is
a. the cashing bank.
b. the depositary bank.
c. the intermediary bank.
d. the payor bank.
B17. Refer to Fact Pattern 28-2B. Capital Credit, Belle’s bank, is
a. the cashing bank.
b. the depositary bank.
c. the intermediary bank.
d. the payor bank.
CHAPTER 28: BANKING IN THE DIGITAL AGE 9
B18. Refer to Fact Pattern 28-2B. When Equity Bank received the check, it was
required to pass it on
a. before midnight of the next banking day.
b. before midnight of the next day, whether or not it was a “banking” day.
c. before noon of the next banking day.
d. within five business days.
B19. When processing a check, Superior Bank encodes information, such as the amount of
the check, on the item. Superior thereby warrants to any subsequent bank or payor
a. the item has been returned to the drawer.
b. nothing.
c. the check has been processed manually.
d. the encoded information is correct.
B20. Misty’s debit card, issued by National United Bank, is stolen and used without
her permission. She tells the bank within thirty days. She may be required to
pay no more than
a. $5.
b. $50.
c. $500.
d. $5,000.
ESSAY QUESTIONS
B1. Qiara steals a check from Reese, forges his signature, and transfers the check
to Salon Beauteous, a beauty and barber salon, for value. Unaware that the
signature is not Reese’s, Salon Beauteous presents the check to Town &
10 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
Country Bank, the drawee, which cashes the check. Reese discovers the
forgery and insists that his bank recredit his account. Can the bank refuse? If
not, from whom can the bank recover?
B2. On an automated teller machine (ATM) belonging to USA Bank, Sven placed a
card-skimming device to pull information from the magnetic strips of users’
debit cards. The device then transmitted the stolen data to thieves who used it
to gain access to, and empty, the bank accounts of the users, including Megan.
Megan learned of the theft the next day and promptly notified USA. Is Megan
entitled to a recredit of her account for the most of the loss due to the theft?
Explain.