Ch.31 Negotiable Instruments Exam Questions

Business Law, 17e (Langvardt)

Chapter 31 Negotiable Instruments

1) In 1990, Revised Article 3 of the UCC was developed, which has now been adopted by all 50 states.

2) There are two types of negotiable instruments.

3) Commercial paper is a contract for the payment of money.

4) A promissory note is a credit instrument.

5) If a bank maintains an electronic deposit and provides the customer with a statement indicating the amount of principal held on a certificate of deposit (CD), such a CD is negotiable.

6) Jim Stanley writes a check on his checking account with a bank. In this instance, the bank is the drawee.

7) Kathy writes a check on her checking account with a bank. In this instance, Kathy is the payee.

8) A cashier's check is a check on which the same bank is both drawer and drawee.

9) A check is a draft that is payable on demand.

10) If a promise or order contains a conspicuous statement that the promise or order is not negotiable, it is not a negotiable instrument even if it meets the test for negotiability.

11) If an instrument is negotiable, the general rules of contract law control.

12) A typed or rubber-stamped signature is sufficient if it was put on the instrument to validate it.

13) If an instrument is an order to pay, it must contain an unconditional order.

14) Under the Revised Article 3 of the UCC, variable interest rate notes are not negotiable.

15) Instruments cannot be negotiable if they are payable in a foreign currency.

16) An instrument that is payable on the happening of some uncertain event is negotiable.

17) A check payable "to cash" is an example of bearer paper.

18) An instrument can be made payable to two or more payees.

19) When there is a conflict concerning the amount on a check between the printed and the handwritten terms, the handwritten term will prevail.

20) Susie Q, business manager of Pizza Uno, sends a check to Papa Bakery. On the check, the computer prints "TWO DOLLARS" in the description line field and "$200" in the numeric field. Susie signed the check and did not notice the discrepancy. The bank should honor the check for $2.

21) Checks and drafts are:

A) documents required as evidence for shipment of goods.

B) documents that detail the transaction between a seller and a buyer.

C) orders to another person to pay money to a third person.

D) promises to pay another person money.

22) The term commercial paper is defined as a(n):

A) contract for the payment of money.

B) agreement between nations for the benefit of commerce.

C) receipt of goods bartered between businesses.

D) warranty on goods shipped in international commerce.

23) Jill takes a loan from a bank. She signs a standard-form note prepared by the bank. The note obligates Jill to pay to the bank the amount of the loan, plus interest. Jill is the:

A) maker of the note.

B) bearer of the note.

C) drawee of the note.

D) payee of the note.

24) Which of the following instruments is a written order, usually directed to a bank, to pay money from a person's account to a third person?

A) Check

B) Promissory note

C) Certificate of deposit

D) Draft

25) Joe writes a check payable to Advanced Autos. The check is drawn on his checking account with Progressive Bank. The drawee on this check is:

A) Joe.

B) Progressive Bank.

C) Advanced Autos.

D) the Federal Reserve.

26) If Viola owes Tina money, Tina may draw a document for the amount of the debt, naming Viola as drawer and herself or her bank as payee, and send the document to Viola's bank for payment. This document is a:

A) promissory note.

B) certificate of deposit.

C) draft.

D) bond.

27) Melissa Seles has a checking account at the Union Bank of New York. She goes to Home Depot and agrees to buy a room heater priced at $200. She writes a check to pay for it. The Union Bank of New York is the:

A) bearer.

B) drawer.

C) payee.

D) drawee.

28) Selena Johnson has a checking account at the Union Bank of New York. She goes to Home Depot and agrees to buy a room heater priced at $200. She writes a check to pay for it. Home Depot is the:

A) payer.

B) drawer.

C) payee.

D) drawee.

29) Shania Watson has a checking account at the Capital Bank of New York. She goes to Lowe's and agrees to buy an electric water heater priced at $700. She writes a check to pay for it. Shania is the ________ of the check.

A) payer

B) drawer

C) payee

D) drawee

30) A check drawn by a credit union on its account at a federally insured bank would be an example of a:

A) cashier's check.

B) teller's check.

C) counter check.

D) traveler's check.

31) A ________ check is a draft on which the drawer and drawee are the same bank (or branches of the same bank).

A) cashier's

B) teller's

C) certified

D) traveler's

32) A check or draft that one bank draws upon another bank is called a:

A) certified check.

B) cashier's check.

C) teller's check.

D) bearer check.

33) Which of the following contains both an acknowledgement by a bank that it has received money and a promise to repay money?

A) Commerce treaty

B) Articles of Organization

C) Certificate of Deposit

D) Escrow

34) Which of the following statements does NOT affect an instrument's negotiability?

A) A draft that says: "Pay to the order of Sue Smith once she repairs my computer."

B) An instrument that says: "This confirms my $1,000 debt to Sue Smith."

C) A note that says: "Payment is conditional upon the terms of the mortgage between the parties dated June 1, 2000."

D) A notes that says: "This note is secured by the property described in the parties' mortgage of June 1, 2000."

35) Tim contracts with Home Dairy to deliver a bottle of milk to Tim's house every day. Home Dairy assigns Tim's contract to Mother Dairy. Tim is notified of the change and continues to get his daily bottle of milk. His contract is now with Mother Dairy. In this instance, Mother Dairy is the:

A) assignee.

B) beneficiary.

C) holder in due course.

D) assignor.

36) A holder in due course of a negotiable instrument takes the instrument free of all defenses to the instrument except those that concern its:

A) validity.

B) reliability.

C) adaptability.

D) collectability.

37) A holder in due course is subject to the defense of ________ if the maker of a note wrote it under a threat of force.

A) fraudulent inducement

B) infancy

C) duress

D) breach of warranty

38) The ________ has adopted a regulation that alters the rights of a holder in due course in consumer purchase transactions.

A) Securities and Exchange Commission

B) Consumer Product Safety Commission

C) Bureau of Consumer Financial Protection

D) Federal Trade Commission

39) A check is NOT negotiable if it:

A) reads "Pay Kim Turner."

B) states that it is payable only on a certain condition.

C) is signed with a rubber-stamped signature.

D) is issued by a drawer who lacks capacity to contract.

40) A person creates a handwritten instrument in pencil on a piece of wrapping paper. The instrument is:

A) negotiable even though it is handwritten.

B) nonnegotiable because it is handwritten.

C) nonnegotiable since it is written on a piece of wrapping paper.

D) void.

41) To qualify as a negotiable instrument, an instrument in the form of a note must be signed by the:

A) payee.

B) drawee.

C) assignee.

D) maker.

42) Which of the following statements will cause an instrument to be nonnegotiable?

A) "Payment is subject to the terms of a mortgage dated August 30, 2005."

B) "Payment is secured by a mortgage dated August 30, 2005."

C) "Payment is in consideration of two months' rent."

D) "Payment to be made 30 days after date, for a note dated August 30, 2005."

43) Which of the following is a negotiable instrument?

A) "I owe you $100."

B) "I promise to repay the loan of $3,000 only if I succeed in my business."

C) "I promise to pay you the sum of $300 in the next week."

D) "Please pay the bearer the amount of $500."

44) Which of the following would be a nonnegotiable instrument?

A) "Payment is subject to the terms of a mortgage dated August 12, 2011."

B) A statement in the instrument that it was given in payment of last month's rent.

C) A statement in the instrument that it was given in payment of the purchase price of goods.

D) "This note is secured by a mortgage dated January 13, 2011."

45) A conditional indorsement:

A) destroys the negotiability of the instrument.

B) does not destroy the negotiability of an otherwise negotiable instrument.

C) validates the instrument.

D) does not destroy the negotiability of the instrument but invalidates it.

46) Payments made with a credit card and payments made with a debit or ATM card are subject to:

A) both the federal law and the state law.

B) only federal laws.

C) only state laws.

D) only local laws.

47) Traveler's checks that commonly require, as a condition to payment, a countersignature of a person whose specimen signature appears on the draft. Traveler's checks are:

A) voidable.

B) negotiable.

C) nonnegotiable.

D) unenforceable.

48) The Code determines negotiability at ________, so that indorsements do not affect the underlying negotiability of the instrument.

A) precompliance

B) abeyance

C) issuance

D) disaffirmance

49) The requirement that, to be negotiable, an instrument must promise or order payment of a fixed amount of money applies:

A) only to principal.

B) only to interest.

C) to both principal and interest together.

D) neither to principal nor interest.

50) If the description of interest in the instrument does not allow the amount of interest to be ascertained, then interest is payable at the:

A) variable rate.

B) judgment rate.

C) order rate.

D) fixed rate.

51) Which of the following instruments is nonnegotiable?

A) "I promise to pay to the order of Carol Reed $40, Jerry Jacobs."

B) A statement in the instrument that it was given in payment of the previous month's rent.

C) A statement in the instrument that it was given in payment of the purchase price of goods.

D) "I promise to pay to the order of Meg Raven, at my option, $100 or five baskets of oranges, Dan Gilbert."

52) The rate of interest courts impose on losing parties until they pay the winning parties is known as a(n):

A) variable rate.

B) order rate.

C) judgment rate.

D) fixed rate.

53) Marion purchased a digital camera, paying with a promissory note. The note stated that Marion promised to pay $300 (the purchase price of the camera) in 10 monthly installments of $30 plus interest. Payments are due on the first day of each month, starting in January 2010. The interest is to be calculated as "three percent over the Chase Manhattan Prime Rate." Is this instrument negotiable?

A) No, because the future prime rate is not known at the time of the making of the note.

B) No, because the note does not describe a fixed amount of money to be paid.

C) Yes, because the variable rate of interest is calculated by reference to an index.

D) Yes, because the future prime rate is known at the time of the making of the note.

54) Which of the following is nonnegotiable?

A) A note that does not state any other undertaking by the person promising to do any act in addition to the payment of money

B) A draft payable "15 days after sight"

C) A note with a clause permitting the time for payment to be accelerated at the option of the maker

D) A note that is payable "when the interest rate on 30-year treasury bonds reaches 10 percent"

55) An instrument payable on demand is:

A) not payable before the date of the instrument.

B) payable before the date of the instrument.

C) not payable after the date of the instrument.

D) nonnegotiable without a date.

56) Which of the following is true if an instrument is undated?

A) Its date is the date it is signed by the maker or the drawer.

B) Its date is the date it is issued by the maker or the drawer.

C) Its date is the date it is received by the payee.

D) The instrument is nonnegotiable if it is undated.

57) Which of the following can be negotiated or transferred only by indorsement?

A) Order paper

B) Bearer paper

C) Cashier's check

D) Teller's check

58) Which of the following is nonnegotiable?

A) A check written "Pay James Watson."

B) A note written "I promise to pay James Watson."

C) A note written "I promise to pay James Watson or bearer."

D) A draft payable "to the order of bearer."

59) Carl writes a check made payable to "Patricia Sullivan or William Hayes." Who may negotiate the check?

A) Neither Patricia nor William, because the check is unenforceable.

B) Patricia, because she is the first named party to whom the check is made payable.

C) William, because he is the last named party to whom the check is made payable.

D) Either Patricia or William may negotiate the check.

60) Except for ________, to be negotiable an instrument must be "payable to order or to bearer."

A) promissory notes

B) bonds

C) checks

D) certificates of deposit

61) A(n) ________ can be negotiated or transferred by delivery of possession without indorsement.

A) order paper

B) bearer paper

C) cashier's check

D) teller's check

62) Which of the following is the order of priority when there is a conflict in a negotiable instrument?

A) Typewritten terms prevail over printed terms, which prevail over handwritten terms.

B) Printed terms prevail over typewritten terms, which prevail over handwritten terms.

C) Handwritten terms prevail over printed terms, which prevail over typewritten terms.

D) Handwritten terms prevail over typewritten terms, which prevail over printed terms.

63) Clint wrote a check to pay for his phone bill. The amount of the bill was $50. He wrote out the words "Fifty dollars only" but he also wrote "$60" in the area for numbers. As a result, the check:

A) is disqualified as a negotiable instrument.

B) qualifies as a negotiable instrument, and the payee can collect $50.

C) qualifies as a negotiable instrument, and the payee can collect $60.

D) is disqualified as a negotiable instrument, unless Clint's intent is ascertained.

64) Which section of the UCC covers how to deal with conflicting and ambiguous terms in a check?

A) 3-114

B) 3-102

C) 2-104

D) 9-331

65) Which of the following authorizes a creditor to go into court if the debtor defaults and, with the debtor's acquiescence, to have a judgment entered against a debtor?

A) Power of Attorney

B) Articles of Incorporation

C) Commerce treaty

D) Confession of Judgment

66) Which of the following statements about commercial paper is false?

A) The law of commercial paper is covered in Article 2 of the UCC.

B) Commercial paper is a contract for the payment of money.

C) Commercial paper may serve as a substitute for money payable immediately.

D) Commercial paper can be used as a means of extending credit.

67) Liz, the owner of a coffee shop in Dallas, contracts with Steve, a coffee bean supplier from Chicago, for $2,000 worth of coffee beans. Liz orders her bank to pay $2,000 from her account to Steve, or someone designated by Steve. Which of the following statements is false?

A) If the check is properly sent, sending the check is less risky than sending money.

B) If someone steals the check along the way, Liz's bank may not pay anyone but Steve or someone authorized by Steve.

C) The check is an inconvenient and risky way of doing business.

D) The check is a practical substitute for cash.

68) A ________ is a two-party instrument in which one person makes an unconditional promise in writing to pay another person, a person specified by that person, or the bearer of the instrument, a fixed amount of money, with or without interest, either on demand or at a specified, future time.

A) promissory note

B) certificate of deposit

C) cashier's check

D) teller's check

69) A ________ is an order to pay money rather than a promise to pay money.

A) promissory note

B) certificate of deposit

C) draft

D) bond

70) Which of the following occurs when retailers transform paper checks they take from customers and process them electronically?

A) Check transfer

B) Check substitute

C) Check exchange

D) Check conversion

71) Which of the following statements about an assignment is true?

A) For an assignment to be valid, the assignee must be aware of the nature and extent of any defenses that the party liable on the contract might have against the assignor.

B) For an assignment to be valid, the assignee must be put on notice of what rights she is getting from the assignment.

C) The assignee of a contract can obtain no greater rights than the assignor had at the time of the assignment.

D) An assignment only transfers benefits, not liabilities.

72) A(n) ________ is a person who has good title to the instrument, paid value for it, acquired it in good faith, and had no notice of certain claims of defenses against payment.

A) holder in due course

B) beneficiary

C) assignee

D) assignor

73) Which of the following is not a requirement for a person to be considered a holder in due course?

A) The person must have exercised due diligence in determining whether there were certain claims or defenses against the instrument's payment.

B) The person must have paid value for the instrument.

C) The person acquired the instrument in good faith.

D) The instrument cannot bear facial irregularities.

74) For an instrument to be negotiable, it must:

A) contain an undertaking or promise relative to collateral to secure payment.

B) not state any other undertaking or instruction by the person promising or ordering to do any act in addition to the payment of money.

C) contain an authorization for confession of judgment.

D) contain a waiver of benefit of any law intended for the advantage or protection of an obligor.

75) Which of the following statements is false about the writing requirement of negotiable instruments?

A) The in writing requirement is waived if the payable amount is under $100.

B) An instrument is considered to be in writing if it is handwritten.

C) An instrument is considered to be in writing if it is typed.

D) An instrument is considered to be in writing if it is printed.

76) Which of the following "signatures" would be insufficient to qualify an instrument as negotiable?

A) The maker wrote her name on the instrument with the intention of validating it.

B) The drawer drew a symbol on the instrument with the intention of validating it.

C) The maker uses a rubber-stamped signature on the instrument with the intention of validating it.

D) A drawer, who cannot write her name, marked an "X" on the instrument outside of the presence of a witness, with the intention of validating it.

77) Which of the following statements in regard to the "fixed amount" requirement for negotiable instruments is false?

A) If a variable rate of interest is prescribed, the amount of interest is calculated by trade standards.

B) The requirement of a "fixed amount" applies only to principal.

C) If the description of the interest in the instrument does not allow the amount of interest to be ascertained, then interest is payable at the judgment rate in effect at the time interest first accrues.

D) Interest may be stated in the instrument as a fixed or variable amount of money.

78) In Heritage Bank v. Bruha, the case in the text, the court held that:

A) a variable rate of interest that referenced an index by Sherman County Bank rendered the promissory note nonnegotiable.

B) a promissory note that evidenced a revolving line of credit was not a negotiable instrument.

C) a promissory note obtained by fraud and/or misrepresentation was not a negotiable instrument.

D) a promissory note satisfies the "fixed amount of money" requirement if it pertains to a revolving line of credit.

79) ________ is a medium of exchange authorized or adopted by a domestic or foreign government and includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more nations.

A) Domestic currency

B) Foreign currency

C) Embargo

D) Money

80) Which of the following statements about the "payable on demand" requirement of negotiable instruments is true?

A) An instrument may be postdated, and normally an instrument "payable on demand" is not payable before the date of the instrument.

B) A promise or order is "payable on demand" only if it states it is payable on "sight."

C) A promise or order is "payable on demand" only if it states a time for payment.

D) A promise or order is "payable on demand" only if it states it is payable on "demand."

81) As demonstrated in Pelican National Bank v. Provident Bank of Maryland, the case in the text, when checks are ambiguous, courts apply the default rule that:

A) treats the document as if it was payable in the alternative.

B) treats the document as if it was payable jointly.

C) pays the parties pro rata with their claims.

D) a virgule punctuation mark means "and" and not "or."

82) Which of the following is payable to the order of a specific person?

A) Order paper

B) Bearer paper

C) Cashier's check

D) Teller's check

83) Jack writes a check made payable to "Gary Stone and Susan Wright." Who may negotiate the check?

A) Neither Gary nor Susan because the check is unenforceable.

B) Gary because he is the first named party to whom the check is made payable.

C) Either Gary or Susan may negotiate the check.

D) Both Gary and Susan have to negotiate the check.

84) Which of the following additional terms will render an instrument nonnegotiable?

A) A clause protecting collateral to secure payment.

B) A clause providing authorization to confess judgment.

C) A clause waiving the benefit of any law intended for the protection or benefit of any person obligated on the instrument.

D) A clause that provides for an undertaking in addition to the payment of money.

85) In the case in the text, In re Sia, the court held that:

A) the inclusion of the notice provision was burdensome and destroyed the negotiability of the note.

B) the challenged clauses were not additional undertakings, and the note was negotiable.

C) the inclusion of the conditional payment clause did not constitute a "fixed amount of money" and rendered the document nonnegotiable.

D) the challenged clauses were additional undertakings, and the clauses destroyed the negotiability of the note.

86) Alice writes a check "Pay to the order of Caleb." The check is drawn on the Berkley's Bank. Who are the drawer, the drawee, and the payee on this instrument? Why is this check called order paper?

87) Why does negotiability matter? Hint: To what is negotiability a prerequisite? Furthermore, why does this matter? Also, why is it important to society?

88) What are the conditions necessary for a person to be able to accept a negotiable instrument as a substitute for money?

89) To be negotiable, an instrument must be payable on demand or at a definite time. Under this test, how does the law treat instruments that do not state any time for payment?

90) The drafters of Revised Article 3 created a new and significant exception to the requirement that to be negotiable, an instrument must be payable to order or to bearer. What is it?