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Interactive Quiz for ALT-12e, Chapter 24
Chapter 24 – The Function and Creation of Negotiable Instruments
1. If you write a check to pay for your groceries, the check is:
a. a certified note.
b. a negotiable instrument.
c. a promise to pay.
d. a certificate of deposit.
Answers:
a. Incorrect. A check is a kind of draft and is not a certified note.
b. Correct. A check is the most commonly used form of a draft, and a draft is a negotiable instrument.
c. Incorrect. A check is an order to pay, not a promise to pay.
d. Incorrect. A check is not a certificate of deposit.
2. The law governing negotiable instruments derives from which of the following?
a. Chinese law.
b. The northern African law of property.
c. The law merchant.
d. The canon law.
Answers:
a. Incorrect. The law of negotiable instruments is, largely, a product of Western Europe and developed over the course of centuries.
b. Incorrect. The northern African law of property was not the genesis of the law of negotiable instruments.
c. Correct. The law merchant, or lex mercatoria, was a sophisticated body of private law (law not made by government) that was accepted and adhered to by merchants in Europe and in other Western nations.
d. Incorrect. Canon law was a very important body of church law that both complemented and competed with the law merchant, but it did not provide the foundation for the law of negotiable instruments.
3. You write a check to pay for your haircut. In this transaction, who is the drawee?
a. You are, because you drew up the check.
b. Your bank is, because it must pay the check.
c. The person who cuts your hair is, because the check is payable to that person.
d. There is no drawee in this transaction.
Answers:
a. Incorrect. In this transaction you are the drawer.
b. Correct. When a check is written, the bank upon which it is drawn is always the drawee.
c. Incorrect. The person who cut your hair is the payee.
d. Incorrect. A check or draft does involve a drawee, as well as a drawer and a payee.
4. The parties to a promissory note are the payee and:
a. the drawer.
b. the drawee.
c. the notee.
d. the maker.
Answers:
a. Incorrect. The drawer is a party to a draft, not to a promissory note.
b. Incorrect. The drawee is a party to a draft, not to a promissory note.
c. Incorrect. There is no such thing as a notee.
d. Correct. The maker is the party who promises to pay.
5. Which of the following IS NOT required in order for a promissory note to be negotiable?
a. The promise in the note must be made orally.
b. The note must be payable on demand or at a definite time.
c. The note must be an unconditional (nonrevocable) promise to pay.
d. The note must be written.
Answers:
a. Correct. An oral promise cannot be negotiable because negotiable instruments must be in writing.
b. Incorrect. Negotiable instruments must be payable on demand or at a specific time.
c. Incorrect. An essential element of negotiable instruments is that they are not revocable.
d. Incorrect. A promissory note must be in writing in order to be negotiable.
6. In order for a certificate of deposit to be negotiable, the UCC requires that it be signed by whom?
a. By the maker.
b. By the payee.
c. By the promisee.
d. By no one.
Answers:
a. Correct. The party making the promise to pay must sign the CD.
b. Incorrect. The party who will receive payment does not need to sign the CD for it to be negotiable.
c. Incorrect. The promisee is the party receiving the promise of payment, and that person need not sign the CD for the CD to be negotiable.
d. Incorrect. The maker (the bank) must sign the CD.
7. Why does the UCC include a requirement in Article 3 that negotiable instruments be unconditional?
a. So that promisers have easier access to courts.
b. So that fraud is made less difficult.
c. So that negotiable instruments are useful as money substitutes or as credit devices.
d. So that negotiable instruments are used to increase the incidence of bankruptcy.
Answers:
a. Incorrect. The drafters of the UCC were concerned with increasing the utility of negotiable instruments as money substitutes or as credit devices.
b. Incorrect. The drafters of the UCC were not trying to make fraud less difficult.
c. Correct. The drafters of the UCC wanted to encourage the smooth flow of commercial transactions, not hinder these transactions.
d. Incorrect. The drafters of the UCC did want to promote the use of the instruments as credit devices but not in order to increase the bankruptcy rates.
8. If you write a check to pay for repairs to your automobile, presentment occurs when?
a. When you write the check.
b. When you turn the check over to the person repairing the car.
c. When the person repairing the car presents the check to your bank.
d. When your bank presents you with the canceled check.
Answers:
a. Incorrect. Presentment happens when a person presents an instrument to the party liable on the instrument for payment—in this case, the bank.
b. Incorrect. Presentment does not occur in this situation.
c. Correct. Because the bank is liable for payment, presentment occurs when the payee presents the check to the bank.
d. Incorrect. Presentment occurs before the bank returns your canceled check.
9. An acceleration clause allows the holder of a time instrument to do what?
a. Accelerate the sale of a particular kind of good.
b. Demand payment of the entire amount due, with interest, if a certain event occurs.
c. Extend the date of maturity on the note into the future.
d. Accelerate the statute of limitations in a case involving negotiable instruments.
Answers:
a. Incorrect. An acceleration clause deals with payment of a negotiable instrument, not with the sale of a good.
b. Correct. An acceleration clause accelerates payment.
c. Incorrect. This describes an extension clause, not an acceleration clause.
d. Incorrect. An acceleration clause does not give a holder the power to change a statute of limitations.
10. An “extension clause” in a negotiable instrument is:
a. another word for an acceleration clause.
b. the reverse of an acceleration clause.
c. an addition to an instrument that renders it nonnegotiable.
d. a promise to pay in goods rather than money.
Answers:
a. Incorrect. An extension clause is the reverse of an acceleration clause.
b. Correct. An extension clause is the reverse of an acceleration clause because the extension clause allows the date of maturity of an instrument to be extended into the future, not accelerated.
c. Incorrect. An extension clause in a note does not render the note nonnegotiable.
d. Incorrect. This is not what an extension clause is.