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Business Law Chapter 10 Study Guide
True/False
Indicate whether the statement is true or false.
1. The most common type of negotiable instrument is the check.
2. A promissory note is difficult to transfer.
3. A negotiable instrument may be oral or written.
4. The promise in a note or the order in a draft must be unconditional.
5. Drawers are responsible for altered or forged checks regardless of their
care in making out the check.
6. A qualified indorsement limits the liability of the indorser.
7. Holders in due course take instruments of value in good faith and without
notice that the instrument is defective.
8. Personal defenses, such as breach of contract, can be used against a holder
in due course.
9. The Check 21 Act allows electronic processing to clear checks quickly
and safely.
10. If your bank refuses to cash your check when sufficient funds are
available, it would be a breach of the bank’s contract.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
11. An order to a third party to pay money is called a
a. draft.
c. certificate of deposit.
b. note.
d. bill of lading.
12. A draft that is payable upon presentation to the drawee is a(n)
a. time draft.
c. sight draft.
b. accepted draft.
d. immediate draft.
13. A note issued by a bank that earns interest over time is called a
a. certificate of deposit.
c. time draft.
b. secured interest.
d. security agreement.
14. The person who writes a promissory note is called a(n)
a. drawer.
c. payee.
b. maker.
d. acceptor.
15. A check that is more than six months old is a
a. void check.
c. voidable check.
b. stale check.
d. bad check.
16. If you want to cancel a check that you have written but that has not been
paid, you can issue a
a. material alteration order.
c. stop-payment order.
b. stale check order.
d. substitute check order.
17. Negotiability allows for the transferee to become a holder, while
assignability allows for the
a. transferee to avoid liability for errors made as the instrument is
transferred.
b. instrument to be transferred to someone else without the transferee
becoming a holder.
c. transferee to obtain legal indorsements in a timely fashion.
d. instrument to be void of dates and controlling words.
18. In order to be negotiable, negotiable instruments must
a. be made orally or in writing.
c. have a signature.
b. be conditional.
d. not have a definite time they are
due.
19. Which of the following is not authorized under the Electronic Fund
Transfer Act (EFTA)?
a. paying your bills electronically
b. making purchases with your debit card
c. direct deposits into your checking account
d. overdraft protection on all purchases over $500
20. The Check 21 Act allows for a substitute check and a(n)
a. electronic signature to replace the original signature.
b. quick reconciliation process of your checking account.
c. stop-payment order as needed.
d. direct withdrawal from your checking account when requested.
Completion
Complete each statement.
21. A written promise by one person to pay money to another person is called
a(n) ____________________.
22. The words "to the order of" and "to bearer" are words of
____________________.
23. Certificates of deposit generally pay higher ____________________ than
regular savings accounts.
24. Negotiable instruments must be payable ____________________.
25. The omission of the ____________________ does not affect the
negotiability of an instrument.
26. It is important to ____________________ a checking account soon after a
receiving a statement.
27. The bank accepts liability for the payment of money involved in an
international business transaction where a(n) ____________________ of
credit is used.
28. Retail stores often use a(n) ____________________ indorsement by
stamping the words “for deposit only” when they receive checks from
customers.
29. Personal defenses against a(n) ____________________ include breach of
contract, lack of consideration, fraud in the inducement, lack of delivery,
and payment.
Matching
Match each term with its definition.
a. negotiable instrument
f.
b. note
g.
c. maker
h.
d. payee
i.
e. assignment
j.
drawer
drawee
holder in due course
holder
indorsement
30. Someone who takes an instrument for value, in good faith, and without
notice that the instrument is defective
31. Also known as commercial paper
32. A written promise by one person to pay money to another person
33. A person who has a written promise to be paid money by another person
34. The transfer of your rights under a contract to someone else
35. The act of placing one’s signature on an instrument to transfer it to
someone else
36. A person who orders money to be paid in a draft
37. A person to whom an order is given to pay money in a draft
38. Someone who receives a check made out in his or her name
39. A person who has written a promise to pay money to another person
Short Answer
40. What is the function of a negotiable instrument? Describe the essential
elements of a negotiable instrument.