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MODULE 25 COMMERCIAL PAPER 213

MULTIPLE-CHOICE ANSWERS

l. c - - 12. c - - 22. c - - 34. d - - 4S. b - -


2. a - - 13. d - - 24. b - - 3S. d - - 46. c - -
3. c - - 14. a - - 2S. a - - 36. d - - 47. c - -
4. a - - IS. a - - 26. a - - 37. c - - 48. c - -
S. a - - 16. a - - 27. d - - 38. a - - 49. b - -
6. a - - 17. c - - 28. b - - 39. c - - SO. d - -
7. a - - 18. d - - 29. d - - '40. c - -
8. c - - 19. d - - 30. b - - 4l. d - -
9. c - - 20. a - - 31. d - - 42. d - -
10. a - - 21. b - - 32. b - - 43. c - - 1st: _/S - %
ll. d - - 22. a - - 33. c - - 44. b - - 2nd: O=
--.1S - %
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:cted MULTIPLE-CHOICE ANSWER EXPLANATIONS

B. Types of Commercial Paper C. Requirements of Negotiability

1. (c) This is a very common type of restrictive en- drawee.


dorsement. Answer (a) is incorrect because a blank en-
dorsement is one that does not specify any endorsee. An- 5. (a) Drafts and checks are three-party instruments in
swer (b) is incorrect because a qualified endorsement is one which the drawer orders the drawee to pay the payee. Notes
in which the endorser disclaims liability to pay the holder or and certificates of deposit are two-party instruments in
any subsequent endorser for the instrument if it is later dis- which the maker promises to pay the payee.
honored. An example of this is the endorser putting in the
words "without recourse" on the back of the instrument.
Answer (d) is incorrect because a special endorsement refers
to when the endorser indicates a specific person who needs
to subsequently endorse, it.
2. (a) This instrument is a draft because it is a three-
party instrument where a drawer (Dexter) orders a drawee
(Middlesex National Bank) to pay a fixed amount in money
to the payee (Silver). Answer (b) is incorrect because in
order for the instrument to qualify as a check, the instrument
must be payable on demand. In this situation, the instru-
ment held by Silver is a time draft which specifies the pay-
ment date as October 1, 2001. Answer (d) is incorrect be-
cause a promissory note is a two-party instrument in which
one party promises to pay a fixed amount in money to the
payee. Answer (c) is incorrect because a trade acceptance is
a special type of draft in which a seller of goods extends
credit to the buyer by drawing a draft on that buyer directing
the buyer to pay a fixed amount in money to the seller on a
specified date. The seller is therefore both the drawer and
payee in a trade acceptance.
3. (c) Under the Revised Article 3 of the UCC, there
are two basic categories of negotiable instruments (i.e.,
promissory notes and drafts). A certificate of deposit is a
promissory note issued by a bank. A check is a draft drawn
on a bank and payable on demand unless it is postdated.
4. (a) A promissory demand note is a two-party instru-
ment in which the maker (T. T. Tile) promises to pay to the
order of the payee (A. B. Shark) and the payment is made
upon demand with no time period stated. N. A. Abner made
a guaranty but it is still a two-party note. Answers (b), (c),
and (d) are all incorrect because sight drafts, checks, and
trade acceptances are all three-party instruments requiring a
6. (a) All would be negotiable if they said "Pay tor Co. or bearer." Answer (a) is incorrect because the ref-
negotiable to th,e order of Jenny Larson," including a check. erence to the computer purchase agreement does not
instruments are condition payment on this agreement, it simply refers to it.
required to be 7. (a) One of the elements of negotiability is that the
Answer (b) is incorrect because when the words and num-
payable to note be payable to order or to bearer. Under the revised bers are contradictory, the written words control and thus,
order or UCC, this is true for all negotiable instruments except the instrument still contains a fixed amount. Answer (d) is
bearer with checks that do not need the words "to the order of' or incorrect because once an instrument is negotiable andre-
the exception "bearer." Answer (b) is incorrect because signing by the mains unaltered, it is negotiable for all parties.
of checks. payee is a method of negotiation but is not ~ requirement to
This make the instrument negotiable. Answer (c) is incorrect 9. (c) The Revised Article 3 of the UCC allows a ne-
instrument because such references are not required. Answer (d) is gotiable instrument to be payable in any medium of ex-
says "Pay to incorrect because the elements of negotiability do not re- change of the US or a foreign government. Therefore, an-
Jenny quire the stating of any conditions of payment. In fact, such swer (a) is incorrect. Answer (b) is incorrect because nego-
Larson"; conditions can destroy negotiability. tiability IS maintained despite the fact that rate of exchange
therefore, it can fluctuate. This is a fact of doing business internation-
. 8. (c) This promissory note is negotiable because it
can only be ally. Answer (d) is incorrect because the exchange rate can
meets. all of the requirements of negotiability. It is written be determined readily.
negotiable if
and signed. It contairis an unconditional promise to pay a
it is a check.
fixed amount in money. It is payable at a definite time un- 10. (a) This instrument satisfies all of the requirements
All of these
der the UCC even though the maker may extend the due date for negotiability except for the requirement that it be payable
instru-
to March 31, 2001, because this option of the maker to ex- on demand or at a definite time. Since it is payable ten days
ments in the
tend the time is limited to a definite date. And finally, the after the sale of .the maker's diamond ring, the time of pay-
question
instrument is payable to bearer because it states "Pay to As-