Law, Business 7e (Cheeseman) Chapter 22 Creation of Negotiable Instruments 1) The Revised Article 3 of the Uniform Commercial Code is called

"Negotiable Instruments" rather than "Commercial Paper." Answer: TRUE Diff: 1 Topic: Functions of Negotiable Instruments 2) Negotiable instruments may not act as a substitute for money. Answer: FALSE Diff: 2 Topic: Functions of Negotiable Instruments 3) Negotiable instruments serve as a record-keeping device. Answer: TRUE Diff: 1 Topic: Functions of Negotiable Instruments 4) Negotiable instruments enable the credit economy of the United States. Answer: TRUE Diff: 2 Topic: Functions of Negotiable Instruments 5) The revised Article 3 of the UCC replaced the words "Commercial Paper" with "Negotiable Instruments." Answer: TRUE Diff: 2 Topic: Revised Article 3 of the UCC 6) A promissory note for the purchase of an automobile qualifies as a negotiable instrument. Answer: TRUE Diff: 1 Topic: Types of Negotiable Instruments 7) A drawee is not liable on a draft until the drawee has accepted it. Answer: TRUE Diff: 2 Topic: Types of Negotiable Instruments 8) Both a sight draft and a time draft are payable on demand. Answer: FALSE Diff: 2 Topic: Types of Negotiable Instruments 1 2010 Pearson Education, Inc. publishing as Prentice Hall 9) A check is a form of draft that is drawn on a bank. Answer: TRUE Diff: 2 Topic: Types of Negotiable Instruments 10) Both a note and a draft may be payable at a designated future time or on demand. Answer: TRUE Diff: 1 Topic: Types of Negotiable Instruments 11) Both checks and notes have makers. Answer: FALSE Diff: 2 Topic: Types of Negotiable Instruments 12) Checks normally are three-party instruments. Answer: TRUE Diff: 2 Topic: Types of Negotiable Instruments 13) A certificate of deposit is a form of note in which the bank is the maker. Answer: TRUE Diff: 1 Topic: Types of Negotiable Instruments 14) A negotiable instrument must be typewritten. Answer: FALSE Diff: 1 Topic: Creating a Negotiable Instrument 15) The signature of the drawer or maker of a negotiable instrument must be the drawer or maker's full legal name. Answer: FALSE Diff: 1 Topic: Creating a Negotiable Instrument 16) An I.O.U. is another form of note that is considered to be a promise to pay.

Answer: FALSE Diff: 1 Topic: Creating a Negotiable Instrument 17) To be unconditional, a promise to pay cannot refer to another document. Answer: FALSE Diff: 2 Topic: Creating a Negotiable Instrument 2 2010 Pearson Education, Inc. publishing as Prentice Hall 18) The essence of the fixed amount requirement is that a holder of an instrument can calculate the payment required from the face of the instrument. Answer: TRUE Diff: 1 Topic: Creating a Negotiable Instrument 19) A note that requires the performance of services is negotiable so long as there is also a requirement for payment of a fixed amount of money. Answer: FALSE Diff: 2 Topic: Creating a Negotiable Instrument 20) A regular passbook savings account is a form of negotiable instrument. Answer: FALSE Diff: 1 Topic: Creating a Negotiable Instrument 21) A promise to pay engraved in a mile-long steel pipe would qualify as a negotiable instrument as the promise would meet the permanency requirement. Answer: FALSE Diff: 1 Topic: Creating a Negotiable Instrument 22) A variable interest rate note is considered a negotiable instrument under the Revised Article 3 of the UCC. Answer: TRUE Diff: 2 Topic: Creating a Negotiable Instrument 23) An acceleration clause allows the date of maturity of an instrument to be extended to some time in the future. Answer: FALSE Diff: 1 Topic: Prepayment or Extension Clause 24) A nonnegotiable contract is unenforceable. Answer: FALSE Diff: 2 Topic: Nonnegotiable Contracts 25) In an assignment, the assignee cannot receive greater rights than those held by the assignor. Answer: TRUE Diff: 1 Topic: Transfer by Assignment or Negotiation 3 2010 Pearson Education, Inc. publishing as Prentic negotiation refers to the process of reaching agreement on the terms of a negotiable instrument. Answer: FALSE Diff: 1 Topic: Transfer by Assignment or Negotiation 27) Because an indorsement is not required on bearer paper to deliver it, the indorsement has no legal effect. Answer: FALSE Diff: 2 Topic: Transfer by Assignment or Negotiation 28) An instrument that is bearer paper can be changed to order paper by a later indorsement. Answer: TRUE Diff: 2 Topic: Transfer by Assignment or Negotiation 29) Which of the following is true about the law governing negotiable instruments? A) Somewhat fewer than half the states adopted the

original version of Article 3 of the UCC. B) Most negotiable instruments law is contained in federal statutes. C) The most recent version of Article 3 of the UCC was released in 1990. D) Negotiable instruments law comes primarily from common law. E) Both A and C are true. Answer: C Diff: 2 Topic: Functions of Negotiable Instruments Skill: Legal Concepts 30) Which of the following is not one of the general purposes of negotiable instruments? A) to operate as a substitute for money B) to be a record-keeping device C) to provide flexible remedies for the nonbreaching party in the event of a breach D) to facilitate the extension of credit Answer: C Diff: 2 Topic: Functions of Negotiable Instruments Skill: Legal Concepts 31) Which of the following is not one of the four general types of negotiable instruments? A) notes B) drafts C) certificates of deposit D) money orders E) checks Answer: D Diff: 1 Topic: Types of Negotiable Instruments Skill: Legal Concepts 4 2010 Pearson Education, Inc. publishing as Prentice Hall 32) Which of the following is true about drafts? A) Drafts are two-party paper. B) A draft must have a bank as the drawee. C) A draft contains an order to pay. D) All drafts are payable on demand. Answer: C Diff: 2 Topic: Types of Negotiable Instruments Skill: Legal Concepts 33) When does the drawee become liable for payment of a draft? A) when the drawer signs it B) automatically upon its creation C) upon accepting it D) upon the performance of the underlying obligation Answer: C Diff: 2 Topic: Types of Negotiable Instruments Skill: Legal Concepts 34) A sight draft that arises when credit is extended with the sale of the goods is known as: A) a time draft B) a trade acceptance C) a check D) a time note E) a demand note Answer: B Diff: 2 Topic: Types of Negotiable Instruments Skill: Legal Concepts 35) What characteristics are necessary for a draft to be a check? A) It contains an indorsement in blank. B) It is payable on demand, and the drawee is a bank. C) It is payable at a specific time and the drawee is a bank. D) It is a bearer paper. E) There are no separate requirements; the requirements for a draft and a check

are the same. Answer: B Diff: 2 Topic: Types of Negotiable Instruments Skill: Legal Concepts 5 2010 Pearson Education, Inc. publishing as Prentice Hall 36) Which of the following best describes a negotiable promissory note? A) It is any promise to pay a fixed amount of money. B) It is an unconditional promise to pay a sum of money. C) It is a promise to pay a sum of money upon the happening of an event outside the control of the promisor. D) It is an order to a third party to make a payment in order to discharge an obligation of the promisor. E) Both B and C are true. Answer: B Diff: 2 Topic: Types of Negotiable Instruments Skill: Legal Concepts 37) Which of the following correctly describes a certificate of deposit? A) It is a draft that is payable by a bank. B) It is not considered to be a negotiable instrument. C) It is a note that is payable on demand. D) It is a note where the maker is a bank. E) It is a money order where the maker is a bank. Answer: D Diff: 2 Topic: Types of Negotiable Instruments Skill: Legal Concepts 38) All negotiable instruments can be classified into which two general categories? A) checks and drafts B) checks and notes C) notes and certificates of deposit D) notes and drafts E) checks and certificates of deposit Answer: D Diff: 2 Topic: Types of Negotiable Instruments Skill: Legal Concepts 39) Which of the following is not a requirement of negotiability? A) The instrument must be in writing. B) The instrument must be signed by the maker or drawer. C) The instrument must state a fixed amount of money. D) The instrument must contain an indorsement. E) The instrument must contain an unconditional order or promise to pay. Answer: D Diff: 2 Topic: Creating a Negotiable Instrument Skill: Legal Concepts 6 2010 Pearson Education, Inc. publishing as Prentice Hall 40) In order to meet the writing requirement of a negotiable instrument, the writing must: A) be written in clear English B) be permanent and portable C) be prepared in duplicate D) all appear above any signature E) be typewritten rather than handwritten Answer: B Diff: 2 Topic: Creating a Negotiable Instrument Skill: Legal Concepts 41) Where must the signature appear on a negotiable instrument in order to meet the signature requirement?

A) anywhere on the face of the instrument B) anywhere on the face of the instrument or anywhere on the back of the instrument C) on the face only, and only at the end of the instrument D) anywhere on the face, or in the proper indorsement place on the back E) at the end of the instrument on the face, or in the proper indorsement place on the back Answer: A Diff: 2 Topic: Creating a Negotiable Instrument Skill: Legal Concepts 42) Which of the following will result in an instrument being nonnegotiable? A) It contains a variable interest rate such that the amount of interest that will be due cannot be determined at the time the note is created. B) It states that the payment of funds will come from the proceeds of a specific contract. C) It states that the entire balance will become immediately due in the event of a default by the maker. D) It states that the rights of the payee to receive payment are subject to the terms of a separate agreement. E) It is secured by collateral, and the agreement about the collateral is in a separate agreement. Answer: D Diff: 3 Topic: Creating a Negotiable Instrument Skill: Legal Concepts 43) Under Article 3 of the UCC, what is the effect of a note not stating a time for payment? A) The note is void and unenforceable due to vagueness. B) The note is considered nonnegotiable, but might nonetheless be enforceable. C) The note is considered a time instrument with payment due at a reasonable time. D) The note is considered a demand instrument with payment due on demand. Answer: D Diff: 2 Topic: Creating a Negotiable Instrument Skill: Legal Concepts 7 2010 Pearson Education, Inc. publishing as Prentice Hall 44) An instrument that is payable "to the order of bearer" is: A) order paper B) bearer paper C) nonnegotiable because of ambiguity D) nonnegotiable because of a condition Answer: B Diff: 2 Topic: Creating a Negotiable Instrument Skill: Legal Concepts 45) What is the effect of a promissory note containing a conditional promise? A) The note is void. B) The note is voidable. C) The note is enforceable even though it is nonnegotiable. D) The note becomes negotiable once the condition is met. E) The note is negotiable even though the promise is conditional. Answer: C Diff: 2 Topic: Nonnegotiable Contracts Skill: Legal Concepts 46) The transfer of a negotiable instrument in such a manner that

the transferee becomes a holder is known as: A) indorsement B) negotiation C) assignment D) invalidation Answer: C Diff: 1 Topic: Transfer by Assignment or Negotiation Skill: Legal Concepts 47) Which of the following is true about the assignment and the negotiation of a negotiable instrument? A) An assignment does not require a signature whereas a negotiation does. B) A negotiation results in a transfer of rights, but an assignment does not. C) An assignment applies to bearer paper, and a negotiation applies to order paper. D) An assignment can no transfer greater rights than those held by the transferor, whereas the transferee in a negotiation can receive greater rights than those held by the transferor. Answer: D Diff: 2 Topic: Transfer by Assignment or Negotiation Skill: Legal Concepts 8 2010 Pearson Education, Inc. publishing as Prentice Hall 48) The negotiation of an order instrument requires: A) delivery only B) indorsement only C) delivery and indorsement D) delivery, indorsement, and acceptance E) delivery and acceptance Answer: C Diff: 1 Topic: Transfer by Assignment or Negotiation Skill: Legal Concepts 49) Negotiation of which type(s) of instrument requires indorsement? A) be