Negotiation and Transfer of Negotiable Instruments: Interactive Learning Quizzes

Question 1

What is the legal effect of holder in due course (HDC) status?

Accepted Answer

The HDC takes the instrument free of all real and personal defenses.

Answer

The HDC takes the instrument subject to all claims and defenses.

Answer

The HDC takes the instrument subject to real defenses only.

Answer

The HDC takes the instrument free of all personal defenses only.

Question 2

When is the drawee of a check legally obligated to honor the check?

Accepted Answer

When the drawer has sufficient funds in the account and the check is presented within a reasonable time.

Answer

When the drawer has stopped payment on the check.

Answer

When the check is forged.

Answer

Never.

Question 3

Which of the following factors is NOT considered when determining the reasonableness of the time for presentment of a negotiable instrument?

Accepted Answer

The financial condition of the drawer.

Answer

The nature of the instrument.

Answer

The usage of trade or bank practice.

Answer

The circumstances of the particular case.

Question 4

In the context of negotiating and transferring negotiable instruments, which ethical consideration is paramount for parties to uphold?

Accepted Answer

Disclosing all relevant information and avoiding deception

Answer

Pursuing personal gain regardless of ethical implications

Answer

Rushing the process to expedite completion

Answer

Overlooking warning signs or suspicious activity

Question 5

What is the primary legal effect of a holder in due course taking a negotiable instrument?

Accepted Answer

The holder takes the instrument free of most claims and defenses asserted by prior parties

Answer

The holder takes the instrument subject to all claims and defenses asserted by prior parties

Answer

The holder takes the instrument with a right to demand payment from all prior indorsers

Answer

The holder takes the instrument with a warranty that it is genuine and has not been materially altered

Question 6

Which type of indorsement transfers the greatest rights to the indorsee?

Accepted Answer

Blank indorsement

Answer

Special indorsement

Answer

Restrictive indorsement

Answer

Qualified indorsement

Question 7

What is the liability of an indorser who adds the words 'without recourse' to their signature?

Accepted Answer

The indorser is not liable to anyone for payment of the instrument

Answer

The indorser remains liable to the holder for payment of the instrument

Answer

The indorser remains liable to the maker or drawer for the amount of the instrument

Answer

The indorser is liable to the holder for breach of warranty of title

Question 8

What is the legal consequence of a material alteration to a negotiable instrument, such as changing the amount or the due date?

Accepted Answer

The alteration voids the instrument

Answer

The alteration discharges all parties to the instrument

Answer

The alteration is void and has no effect on the instrument

Answer

The holder remains liable to the maker or drawer for the amount of the instrument

Question 9

What is the primary purpose of a stop-payment order issued by the drawer of a check?

Accepted Answer

To prevent payment of a check that has been lost or stolen

Answer

To guarantee payment of a check that has been presented for payment

Answer

To cancel a check that has been issued in error

Answer

To change the payee on a check that has been issued

Question 10

What does the duty of good faith require in the negotiation of negotiable instruments?

Accepted Answer

To act honestly and in accordance with reasonable commercial standards of fair dealing

Answer

To disclose all material facts to the other party

Answer

To guarantee the payment of the instrument

Answer

To negotiate the instrument only for value

Question 11

What is the effect of an acceleration clause in a promissory note?

Accepted Answer

It allows the holder to demand payment of the entire amount of the note immediately upon default

Answer

It extends the maturity date of the note in the event of default

Answer

It waives the holder's right to interest on the note

Answer

It gives the maker the right to prepay the note without penalty

Question 12

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

Accepted Answer

It must be payable in gold or silver.

Answer

It must be in writing.

Answer

It must contain an unconditional promise or order to pay a sum certain.

Answer

It must be payable on demand or at a definite time.

Question 13

What type of endorsement transfers the instrument to a specific person and requires their signature?

Accepted Answer

Special endorsement

Answer

Blank endorsement

Answer

Restrictive endorsement

Answer

Non-restrictive endorsement

Question 14

Who is primarily liable on a negotiable instrument?

Accepted Answer

Maker

Answer

Drawer

Answer

Indorser

Answer

Acceptor

Question 15

What is the purpose of a restrictive endorsement?

Accepted Answer

To prohibit further negotiation of the instrument.

Answer

To limit the amount that can be collected on the instrument.

Answer

To guarantee payment of the instrument.

Answer

To revoke the instrument.

Question 16

What is the effect of a material alteration on a negotiable instrument?

Accepted Answer

It makes the instrument void.

Answer

It renders the instrument voidable at the option of the party who made the alteration.

Answer

It does not affect the validity of the instrument.

Answer

It accelerates the due date of the instrument.

Question 17

According to the Uniform Commercial Code (UCC), which of the following is NOT a fundamental requirement for a negotiable instrument?

Accepted Answer

Contains a waiver of personal defenses.

Answer

Contains an unconditional promise or order to pay.

Answer

Is payable to a specified person or to the bearer.

Answer

Is payable on demand or at a definite time.

Question 18

True or False: A holder in due course of a negotiable instrument takes the instrument subject to all valid defenses of any party to the instrument.

Accepted Answer

True

Answer

False

Question 19

Which of the following is NOT a warranty made by a transferor of a negotiable instrument?

Accepted Answer

Warranty of presentment

Answer

Warranty of good title

Answer

Warranty of no knowledge of defenses

Answer

Warranty of genuineness

Question 20

Under the UCC, which of the following methods of acceptance is NOT allowed for a draft?

Accepted Answer

Verbal acceptance

Answer

Written acceptance

Answer

Electronic acceptance

Answer

Acceptance by conduct

Question 21

True or False: A drawee is primarily liable on a draft.

Accepted Answer

True

Answer

False

Question 22

Which characteristic distinguishes a bearer instrument from other types of negotiable instruments?

Accepted Answer

It is payable to the bearer or order.

Answer

It is payable to a specific individual.

Answer

It requires indorsement for transfer.

Answer

It can only be negotiated through a bank.

Question 23

What is the primary legal consequence of an unqualified indorsement on a negotiable instrument?

Accepted Answer

It transfers ownership and imposes liability on the indorser to subsequent holders.

Answer

It transfers ownership but does not impose liability on the indorser.

Answer

It does not transfer ownership but imposes liability on the indorser.

Answer

It neither transfers ownership nor imposes liability on the indorser.

Question 24

What is the overarching purpose of Article 3 of the Uniform Commercial Code?

Accepted Answer

To regulate the transfer of negotiable instruments

Answer

To govern the sale of goods

Answer

To establish the formation of contracts

Answer

To facilitate the use of electronic signatures

Question 25

What is the primary consequence of making a material alteration to a negotiable instrument?

Accepted Answer

It discharges all parties from liability.

Answer

It discharges only the party who made the alteration.

Answer

It discharges only the party who benefited from the alteration.

Answer

It has no effect on the validity of the instrument.

Question 26

What is the primary purpose of a protest of a dishonored negotiable instrument?

Accepted Answer

To all of the above

Answer

To give notice of dishonor

Answer

To preserve the right to sue the liable parties

Answer

To prevent the statute of limitations from expiring

Question 27

An instrument is considered bearer paper if it is:

Accepted Answer

payable to the bearer or endorsed in blank

Answer

payable to the order of a specific named person

Answer

payable to a specific named person

Question 28

A holder in due course of a negotiable instrument takes the instrument:

Accepted Answer

free from most defenses of prior parties

Answer

subject only to defenses of fraud or forgery

Answer

subject to all defenses of prior parties

Answer

subject only to defenses of infancy or incapacity

Question 29

The Uniform Commercial Code (UCC) governs the law of negotiable instruments in the United States:

Accepted Answer

True

Answer

Only in certain states

Answer

Only for instruments issued by banks

Answer

False

Question 30

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

Accepted Answer

It is payable on presentation

Answer

It is payable only upon the occurrence of a specified event

Answer

It is payable at a specific time

Answer

It is payable in installments

Question 31

A stale check is:

Accepted Answer

a check that is presented for payment more than a reasonable time after its issuance

Answer

a check that is forged

Answer

a check that is drawn on an account with insufficient funds

Question 32

Which of the following is a forged instrument?

Accepted Answer

An instrument that is signed by a person without their authority

Answer

An instrument that is missing an endorsement

Answer

An instrument that is altered after it is signed

Question 33

The drawer of a draft is primarily liable for payment of the instrument:

Accepted Answer

True

Answer

False

Answer

Only if the draft is dishonored

Answer

Only if the draft is accepted by the drawee

Question 34

Which of the following is a requirement for an instrument to be considered negotiable?

Accepted Answer

It must be payable to the bearer or to the order of a named person.

Answer

It must be written on parchment.

Answer

It must be sealed with a wax seal.

Question 35

What is the primary purpose of a restrictive indorsement?

Accepted Answer

To limit the further negotiability of the instrument.

Answer

To transfer ownership of the instrument without recourse.

Answer

To guarantee payment of the instrument.

Question 36

Which of the following is NOT a valid consideration for the negotiation of a negotiable instrument?

Accepted Answer

An illegal act.

Answer

The love and affection of the parties.

Answer

A promise to perform a future act.

Answer

The antecedent debt of the maker.

Question 37

When is a drawee bank liable for wrongful dishonor of a check?

Accepted Answer

When the bank has sufficient funds to pay the check and no valid defense to payment.

Answer

When the drawer has a stop payment order on the check.

Answer

When the check is presented more than six months after its date.

Question 38

What is the legal effect of a material alteration to a negotiable instrument?

Accepted Answer

It discharges all parties to the instrument except for the party responsible for the alteration.

Answer

It has no effect on the validity of the instrument.

Answer

It makes the instrument void.

Question 39

Which of the following is NOT a requirement for an instrument to be negotiable?

Accepted Answer

The instrument must be payable to a specific person.

Answer

The instrument must be signed by the maker or drawer.

Answer

The instrument must be in writing.

Question 40

A holder in due course (HDC) takes a negotiable instrument free from most defenses. Which of the following is a defense that is still available against an HDC?

Accepted Answer

Forgery of the maker's or drawer's signature.

Answer

Breach of contract.

Answer

Lack of consideration.

Answer

Fraud in the inducement.

Question 41

A check is payable to 'John Smith'. John Smith endorses the check by signing his name and writing 'Pay to Jane Doe' above his signature. What type of endorsement has John Smith made?

Accepted Answer

Special endorsement.

Answer

Restrictive endorsement.

Answer

Blank endorsement.

Question 42

Which of the following actions would constitute a 'negotiation' of a promissory note?

Accepted Answer

Delivery of the note by the payee to a third party for value.

Answer

The maker signing the note.

Answer

The payee depositing the note in a bank account.

Question 43

A bank has mistakenly paid a check drawn on its account even though the drawer's signature was forged. What legal recourse does the drawer have against the bank?

Accepted Answer

The drawer can recover the amount from the bank under the theory of breach of warranty.

Answer

The drawer can sue the forger for the amount of the check.

Answer

The drawer has no recourse against the bank.

Question 44

A promissory note states that it is payable 'on demand'. What does this mean?

Accepted Answer

The holder can demand payment at any time.

Answer

The note is only payable upon the death of the maker.

Answer

The note is only payable after a specific period of time.

Question 45

A check is drawn on a bank in New York, but it is payable to a payee in California. What law governs the negotiability of this check?

Accepted Answer

The law of the state where the check is drawn (New York).

Answer

The law of the state where the payee resides (California).

Answer

The law of the state where the check is presented for payment.

Question 46

A draft is payable 'to the order of John Smith'. John Smith wishes to transfer the draft to Jane Doe without signing it. Can he do this?

Accepted Answer

No, because a draft payable to the order of a person requires an endorsement to be negotiated.

Answer

Yes, because the draft is already payable to a specific person.

Answer

Yes, because the draft can be negotiated by simple delivery.

Question 47

A company issues a check to its employee, but the employee's name is misspelled on the check. Can the employee still cash the check?

Accepted Answer

Yes, the employee can still cash the check because it is payable to the order of the employee, even if the name is misspelled.

Answer

No, the employee cannot cash the check because the name is misspelled.

Question 48

Which of the following is NOT a requirement for a negotiable instrument?

Accepted Answer

It must be payable on demand.

Answer

It must be signed by the maker or drawer.

Answer

It must be in writing.

Answer

It must be payable to a specific person or order.

Question 49

A check is considered 'negotiated' when:

Accepted Answer

It is transferred to another person for value.

Answer

It is presented to the drawee bank for payment.

Answer

It is signed by the drawer.

Answer

It is deposited into a bank account.

Question 50

Which of the following is a real defense that can be asserted against an HDC?

Accepted Answer

Forgery of the maker's signature.

Answer

Fraud in the inducement.

Answer

Failure of consideration.

Answer

Breach of contract.

Question 51

A promissory note payable to 'Cash' is considered:

Accepted Answer

Payable to bearer.

Answer

Invalid because it lacks a payee.

Answer

Payable to the maker.

Answer

Payable to order.

Question 52

A drawer of a check is liable to the payee if:

Accepted Answer

The check is dishonored by the drawee bank.

Answer

The payee alters the check amount.

Answer

The check is lost or stolen.

Question 53

Which of the following methods of transferring a negotiable instrument requires the signature of the transferor?

Accepted Answer

Endorsement.

Answer

Assignment.

Answer

Gift.

Answer

Delivery.

Question 54

A blank endorsement on a negotiable instrument makes it:

Accepted Answer

Payable to bearer.

Answer

Invalid.

Answer

Payable only to the original payee.

Answer

Payable to the order of the endorser.