Commercial Paper: Negotiable Instruments, Checks, and More

Question 1

Which characteristic does NOT apply to negotiable instruments?

Accepted Answer

Transferable only through formal assignment

Answer

Written instruments

Answer

Unconditional promise or order to pay

Answer

Payable on demand or at a fixed or determinable future time

Question 2

Which of the following is NOT a defining characteristic of a negotiable instrument?

Accepted Answer

Must be in bearer form

Answer

Written and signed by the maker or drawer

Answer

Transferable to a third party

Answer

Promise to pay a certain sum of money on demand or at a definite time

Question 3

Which requirement is NOT essential for a promissory note to be considered negotiable?

Accepted Answer

Conditional promise to pay

Answer

Written form

Answer

Maker's signature

Answer

Payment on demand or at a specified future date

Question 4

Which among the following is NOT a type of commercial paper?

Accepted Answer

Invoices

Answer

Checks

Answer

Promissory notes

Answer

Drafts

Question 5

Which defense is NOT valid against a claim on a promissory note?

Accepted Answer

Statute of limitations

Answer

Fraud

Answer

Illegality

Answer

Lack of capacity

Question 6

What is the legal term for the person who receives payment on a check?

Accepted Answer

Payee

Answer

Drawer

Answer

Drawee

Answer

Endorser

Question 7

Which type of promissory note is commonly used in business-to-business transactions?

Accepted Answer

Trade acceptance

Answer

Demand note

Answer

Time note

Answer

Certified note

Question 8

What is the primary function of a letter of credit in international trade?

Accepted Answer

To guarantee payment to the seller

Answer

To provide financing to the buyer

Answer

To verify the identity of the buyer

Answer

To track shipments

Question 9

Which of the following is an essential legal element of a negotiable instrument?

Accepted Answer

Must contain an unconditional promise to pay

Answer

Must be signed by the maker

Answer

Must be payable on demand

Answer

Must specify a specific due date

Question 10

What is the effect of a restrictive endorsement on a check?

Accepted Answer

Limits payment to the specified endorsee only

Answer

Transfers ownership of the check without the endorser's guarantee

Answer

Extends the time limit for cashing the check

Answer

Makes the check non-negotiable

Question 11

What is the primary purpose of a sight draft?

Accepted Answer

To demand immediate payment

Answer

To extend credit to the buyer

Answer

To guarantee payment for goods purchased

Answer

To track shipments

Question 12

What is the key distinction between a demand note and a time note?

Accepted Answer

Demand note requires immediate payment; time note has a specified due date

Answer

Time note requires immediate payment; demand note has a specified due date

Answer

Demand note is more secure than a time note

Answer

Time note has a higher rate of interest than a demand note

Question 13

When an endorser signs a negotiable instrument with the words 'without recourse,' what is the extent of their liability to subsequent holders?

Accepted Answer

No liability

Answer

Full liability

Answer

Limited liability

Answer

Conditional liability

Question 14

Which of the following is NOT a defining characteristic of negotiable instruments?

Accepted Answer

Are unrestricted in terms of negotiability

Answer

Easily transferable through endorsement and delivery

Answer

Contain an unconditional promise or order to pay

Answer

Must be created in writing

Question 15

What is the legal effect of a bank's certification on a check?

Accepted Answer

Guarantees payment by the bank

Answer

Guarantees acceptance by the drawee

Answer

Transfers funds from the drawer's account to the drawee's account

Answer

Invalidates the check

Question 16

What is the primary purpose of a letter of credit?

Accepted Answer

To provide a guarantee of payment for goods or services

Answer

To secure financing for the buyer

Answer

To facilitate the transfer of funds between banks

Answer

To promote international trade

Question 17

Which of the following is NOT a type of commercial draft?

Accepted Answer

Promissory note

Answer

Trade acceptance

Answer

Banker's acceptance

Answer

Sight draft

Question 18

What is the legal liability of an accommodation party on a negotiable instrument?

Accepted Answer

Secondarily liable for payment

Answer

Primarily liable for payment

Answer

Not liable for payment

Answer

Guarantor of payment

Question 19

Which characteristic is NOT attributed to negotiable instruments?

Accepted Answer

Requires a signature from the recipient

Answer

Transferable through endorsement

Answer

Conveys an unconditional promise to pay

Answer

Specifies a fixed maturity date

Question 20

What is the primary function of a check in commercial transactions?

Accepted Answer

Facilitating the transfer of funds

Answer

Establishing a line of credit

Answer

Serving as a conditional promise to pay

Answer

Securing payment for borrowed capital

Question 21

Which of the following is accurately classified as a type of promissory note?

Accepted Answer

Demand note

Answer

Time draft

Answer

Certified check

Answer

Acceptance

Question 22

Primary purpose of a letter of credit in commercial transactions is to:

Accepted Answer

Guarantee payment for goods or services

Answer

Provide financing for businesses

Answer

Establish a credit line

Answer

Facilitate international trade

Question 23

For an acceptance on a draft to be considered valid, it must:

Accepted Answer

Satisfy all of the above criteria

Answer

Be inscribed on the draft itself

Answer

Unconditionally agree to payment

Answer

Bear the drawee's signature

Question 24

Which of the following is NOT a type of commercial paper?

Accepted Answer

Bonds

Answer

Negotiable instruments

Answer

Checks

Answer

Promissory notes

Question 25

What is the primary purpose of a promissory note?

Accepted Answer

To acknowledge a debt and promise to pay it

Answer

To guarantee payment for goods or services

Answer

To transfer funds from one bank account to another

Answer

To establish a line of credit

Question 26

Who is primarily liable on a check?

Accepted Answer

Drawer

Answer

Drawee

Answer

Payee

Answer

Indorser

Question 27

What is the difference between a demand draft and a time draft?

Accepted Answer

Demand drafts are payable immediately, while time drafts are payable at a future date

Answer

Time drafts are payable immediately, while demand drafts are payable at a future date

Answer

Demand drafts are unconditional promises to pay, while time drafts are conditional promises to pay

Answer

There is no difference between demand drafts and time drafts

Question 28

Which of the following factors is NOT considered when determining the good faith of a Holder in Due Course?

Accepted Answer

Whether the holder is a merchant

Answer

Whether the holder had notice of any defenses

Answer

Whether the holder paid value for the commercial paper

Answer

Whether the holder acted in a commercially reasonable manner

Question 29

Which of the following is NOT considered a negotiable instrument?

Accepted Answer

Bill of lading

Answer

Promissory note

Answer

Check

Answer

Draft

Question 30

What is the primary purpose of a promissory note?

Accepted Answer

To serve as a written promise to pay a sum of money at a future date

Answer

To create a legal obligation between a buyer and seller

Answer

To transfer funds from one bank account to another

Answer

To authorize a third party to act on behalf of a principal

Question 31

Which type of check is used when the drawer wants to prevent payment?

Accepted Answer

Stop payment check

Answer

Cashier's check

Answer

Certified check

Answer

Personal check

Question 32

What is the main distinction between a draft and a check?

Accepted Answer

A draft requires the acceptance of the drawee, while a check does not.

Answer

A draft is drawn on a bank account, while a check is drawn on a financial institution.

Answer

A draft is typically used for international transactions, while a check is used for domestic transactions.

Answer

A draft is always payable on demand, while a check can be postdated.

Question 33

What is the "holder in due course" doctrine?

Accepted Answer

A legal principle that protects good faith purchasers of commercial paper

Answer

A rule that allows the maker of a note to avoid liability if they can prove fraud

Answer

A defense that can be raised against any type of commercial paper

Answer

A requirement that all commercial paper must be presented to the bank within a certain time period

Question 34

What is the significance of the Uniform Commercial Code (UCC) in commercial paper transactions?

Accepted Answer

It establishes uniform laws governing the issuance, negotiation, and enforcement of commercial paper

Answer

It only applies to transactions involving large sums of money

Answer

It protects only consumers, not businesses

Answer

It is not applicable in all states

Question 35

In the case of bearer paper, who legally possesses the instrument?

Accepted Answer

The person who currently has the document

Answer

The person who created the document

Answer

The person who is expected to make the payment

Answer

The person to whom payment should be made

Question 36

A maker of a promissory note can claim lack of consideration when:

Accepted Answer

They received no value in exchange for signing the note.

Answer

They were under the influence of drugs or alcohol while signing.

Answer

They were forced to sign the note against their will.

Question 37

In international trade, when is it highly advisable for a business to use a letter of credit (LOC)?

Accepted Answer

When there's a lack of trust between the buyer and seller

Answer

When the buyer has a strong credit history

Answer

When the goods being traded are highly perishable

Question 38

What is a key characteristic that distinguishes negotiable instruments from other financial documents?

Accepted Answer

They must be payable on demand or within a specific timeframe.

Answer

They must specify a precise sum of money owed.

Answer

They can only be transferred through physical delivery.

Answer

They must be backed by a valuable asset.

Question 39

Which defining trait allows a negotiable instrument to be transferred to another person without creating a new contract?

Accepted Answer

Transferability

Answer

Written and signed

Answer

Promise to pay

Answer

Collateralized

Question 40

According to the Uniform Commercial Code (UCC), which action is NOT a right granted to holders of commercial paper?

Accepted Answer

Alter the terms of the instrument

Answer

Demand payment

Answer

Negotiate the instrument

Answer

Present the instrument for payment

Question 41

Which of the following is NOT an essential element required for an instrument to be a negotiable instrument?

Accepted Answer

Acceptance

Answer

Bearer or order

Answer

Fixed maturity date

Answer

Unconditional promise to pay

Question 42

Classify the following financial instrument: A written order signed by the drawer, instructing the drawee to pay a specified sum of money to the payee.

Accepted Answer

Draft

Answer

Promissory note

Answer

Bill of lading

Answer

Certificate of deposit

Question 43

What is the fundamental distinction between a promissory note and a draft?

Accepted Answer

A promissory note represents a promise to pay, while a draft represents an order to pay.

Answer

A draft is signed by the maker, whereas a promissory note is signed by the drawer.

Answer

A promissory note typically has a longer maturity period than a draft.

Question 44

In a promissory note transaction, who bears the primary responsibility for payment?

Accepted Answer

Maker

Answer

Drawer

Answer

Payee

Answer

Endorser

Question 45

What is the primary function of a letter of credit?

Accepted Answer

To provide a guarantee of payment from a bank

Answer

To open a new line of credit

Answer

To collect on past-due debts

Answer

To transfer funds between countries

Question 46

What is the legal effect of endorsing a check?

Accepted Answer

It transfers the rights of the endorser to the endorsee.

Answer

It guarantees payment of the check

Answer

It cancels the check

Question 47

Which of the following is a characteristic of a bearer instrument?

Accepted Answer

It is payable to the person in possession of it

Answer

It is not subject to defenses

Answer

It is only payable to the original payee

Answer

It must be endorsed to be transferred

Question 48

What is the purpose of issuing a post-dated check?

Accepted Answer

To delay the payment date

Answer

To prevent the check from being cashed

Answer

To increase the interest rate

Answer

To cancel the check

Question 49

Which of the following accurately defines commercial paper?

Accepted Answer

It is a short-term, unsecured promissory note.

Answer

It is a negotiable instrument that represents ownership in a company.

Answer

It is a long-term, secured loan.

Question 50

What is the primary purpose of a check?

Accepted Answer

To transfer funds between bank accounts.

Answer

To guarantee payment for goods or services.

Answer

To make a purchase without immediate payment.

Question 51

What legal recourse is available to the holder of a dishonored draft?

Accepted Answer

File a lawsuit against the drawer.

Answer

Negotiate a new payment arrangement.

Answer

Cancel the sale of goods.

Answer

Return the draft to the drawee.

Question 52

What is the critical distinction between an accommodation party and an endorser?

Accepted Answer

An accommodation party is not primarily liable for the instrument.

Answer

An accommodation party can only be a bank.

Answer

An endorser is always required to pay the instrument.

Question 53

What is the primary purpose of a UCC filing?

Accepted Answer

To provide public notice of a security interest in property.

Answer

To establish a lien on property.

Answer

To register a trademark or patent.