CPA Regulation Reg Quiz: Identify Negotiable Instruments

What this quiz covers

This quiz focuses on Identify Negotiable Instruments, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Regulation Reg.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. A promissory note involves two parties (maker and payee) and contains a promise to pay; a draft involves three parties (drawer, drawee, and payee) and contains an order to pay. (correct answer)
2. A promissory note must be payable on demand; a draft must be payable at a definite future date.
3. A promissory note is used only for real estate transactions; a draft is used only for commercial transactions.
4. A promissory note requires a bank as the drawee; a draft may use any person as the drawee.

Explanation: A promissory note is a two-party instrument in which the maker promises to pay the payee (or bearer). A draft is a three-party instrument in which the drawer orders the drawee (a third person, often a bank) to pay the payee. A check is the most common form of draft - the depositor (drawer) orders the bank (drawee) to pay the payee. Answer B is incorrect because both instruments may be payable on demand or at a definite time. Answer C incorrectly restricts their use. Answer D is incorrect because a note does not involve a bank or drawee at all.

Question 2

1. Any reference to a person's name.
2. The words 'payable to the order of cash.'
3. The payment must be conditional on demand.
4. The instrument must be payable to the order of an identified person (such as 'Pay to the order of Jane Doe') or must be payable to bearer. (correct answer)

Explanation: Under UCC Section 3-109 and 3-104, the order/bearer requirement for negotiability requires either: (1) payable to the order of an identified person ('Pay to the order of Jane Doe') - this is order paper; or (2) payable to bearer or to cash - this is bearer paper. Simply naming a person without 'order' language (e.g., 'Pay Jane Doe') may not satisfy the requirement under strict UCC interpretation, though courts and the UCC have been flexible about this in practice. Answer A (any reference to a name) is insufficient without 'order' or 'bearer' language. Answer B ('pay to the order of cash') would be bearer paper. Answer C describes a payment condition unrelated to the order/bearer requirement.

Question 3

1. A blank endorsement converts the instrument into an order instrument requiring further endorsement for negotiation.
2. A blank endorsement voids the instrument.
3. A blank endorsement converts the instrument to bearer paper, allowing subsequent negotiation by delivery alone without further endorsement. (correct answer)
4. A blank endorsement restricts the instrument to the endorser's bank account only.

Explanation: Under UCC Section 3-205(b), a blank endorsement (the endorser's signature alone, without naming a new payee) converts any instrument - including order paper - into bearer paper. Once converted to bearer paper, the instrument may be negotiated by delivery alone, without any further endorsement. This is why blank-endorsed checks left in accessible places can be cashed by anyone who finds them. Answer A reverses the effect; blank endorsement creates bearer, not order, paper. Answer B is incorrect because endorsement does not void an instrument. Answer D describes a restrictive endorsement, not a blank one.

Question 4

1. Order paper payable to John Smith, requiring John Smith's endorsement plus delivery for further negotiation. (correct answer)
2. Bearer paper because a new name was added.
3. A non-negotiable instrument because it has been endorsed.
4. A restricted instrument that can only be deposited by John Smith.

Explanation: Under UCC Section 3-205(a), a special endorsement identifies a specific person as endorsee and makes the instrument payable to that person's order. After a special endorsement ('Pay to John Smith'), the instrument becomes payable to the order of John Smith - it is order paper requiring John Smith's endorsement plus delivery for any further negotiation. Answer B is incorrect because a special endorsement creates order paper, not bearer paper. Answer C is incorrect because endorsement is a normal step in negotiation; it does not destroy negotiability. Answer D describes a restrictive endorsement (such as 'for deposit only'), not a special endorsement.

Question 5

1. No, because CDs are savings products and are not transferable.
2. No, because CDs are not signed by the maker.
3. Yes, but only if it has a maturity date of exactly one year.
4. Yes, if it meets the requirements of UCC Article 3, including being a written promise signed by the bank to pay a fixed amount on demand or at a definite time, payable to order or bearer. (correct answer)

Explanation: A certificate of deposit is a form of promissory note issued by a bank acknowledging deposit of funds and promising repayment with interest. Under UCC Section 3-104(j), CDs are specifically identified as a type of negotiable instrument (a 'note' issued by a bank). They must meet the same formal requirements as other notes. Answer A is incorrect because CDs can be and are transferred. Answer B is incorrect because CDs are indeed signed by the bank. Answer C is incorrect because there is no one-year maturity requirement for CDs as negotiable instruments; they may have various maturities.

Question 6

1. The endorser disclaims secondary liability on the instrument; if the instrument is dishonored, the holder cannot look to the endorser for payment. (correct answer)
2. The endorser accepts primary liability on the instrument.
3. The instrument becomes bearer paper that can be transferred without further endorsement.
4. The endorser guarantees that all prior parties have valid defenses.

Explanation: Under UCC Section 3-415(b), an endorser who endorses 'without recourse' disclaims their secondary (contract) liability on the instrument. Normally, an unqualified endorser promises that if the instrument is dishonored, they will pay. A 'without recourse' (qualified) endorser makes no such promise; the holder cannot seek payment from them if the instrument is dishonored. The endorser still makes transfer warranties. Answer B is incorrect because 'without recourse' reduces, not increases, the endorser's liability. Answer C is incorrect because 'without recourse' relates to payment liability, not the order/bearer status. Answer D is incorrect because transfer warranties, not guarantees of others' defenses, survive a qualified endorsement.

Question 7

1. No, because UCC Section 3-108(b)(i) expressly provides that an instrument is still payable at a definite time even if it is subject to an acceleration clause, as acceleration merely makes the note payable earlier than the stated maturity. (correct answer)
2. Yes, because acceleration makes the payment date uncertain.
3. Yes, because acceleration clauses are not permitted under Article 3.
4. No, but only if the acceleration is automatic, not at the holder's option.

Explanation: Under UCC Section 3-108(b), an otherwise negotiable instrument remains payable at a definite time even if it is subject to: (1) acceleration clauses (making it payable earlier than stated), (2) extension clauses (allowing extension for a definite time), or (3) prepayment rights. The acceleration clause does not destroy the definite time requirement because it only causes earlier payment, not indefinite payment. Answer B is incorrect because the UCC expressly preserves negotiability for instruments with acceleration clauses. Answer C is incorrect because acceleration clauses are specifically contemplated by Article 3. Answer D is incorrect because Article 3 does not distinguish between automatic and optional acceleration for this purpose.

Question 8

1. Yes, because the maturity date is not fixed.
2. No, because UCC Section 3-108(b)(ii) expressly provides that an instrument is payable at a definite time even if it is subject to extension to a further definite time at the option of the maker or holder. (correct answer)
3. Yes, because extension clauses are prohibited under Article 3.
4. No, only if the extension is automatic rather than at the maker's option.

Explanation: Under UCC Section 3-108(b)(ii), an instrument payable at a definite time is still negotiable if it permits the maker or holder to extend the maturity to a further definite time. Extension to 'a further definite time' (one additional year in this case) is specifically authorized and does not destroy negotiability. Answer A is incorrect because the UCC expressly permits such extension clauses. Answer C is incorrect because extension clauses are expressly contemplated and permitted. Answer D is incorrect because the Article 3 rule does not distinguish between automatic and optional extensions.

Question 9

1. It is order paper requiring endorsement of the word 'cash' plus delivery.
2. It is not a negotiable instrument because 'cash' is not a legal entity.
3. It is bearer paper because 'cash' is not an identified person; it may be negotiated by delivery alone. (correct answer)
4. It is neither order nor bearer paper and requires a court order to transfer.

Explanation: Under UCC Section 3-109, an instrument is bearer paper if it is payable to 'cash' or 'to the order of cash.' 'Cash' is not an identified person, so the instrument functions as bearer paper - it may be negotiated by delivery alone without endorsement. Answer A is incorrect because 'cash' cannot endorse an instrument. Answer B is incorrect because the UCC specifically recognizes 'pay to the order of cash' as bearer paper. Answer D is incorrect because the instrument is clearly bearer paper requiring only delivery.

Question 10

1. A teller's check is a draft drawn by a bank on another bank, or payable at or through a bank; it is similar to a cashier's check but is drawn on a different bank (such as a correspondent bank) rather than the issuing bank itself. (correct answer)
2. A teller's check is a check written by a bank teller on the customer's personal account.
3. A teller's check is issued by the Federal Reserve Bank for large commercial transactions.
4. A teller's check is a post-dated check that a teller holds until the future date.

Explanation: Under UCC Section 3-104(h), a teller's check is a draft drawn by a bank on another bank, or payable at or through a bank. The key distinction from a cashier's check is that a cashier's check is drawn by a bank on itself (making the issuing bank both drawer and drawee), while a teller's check is drawn by one bank on a different bank - often a correspondent bank. Both represent highly reliable payment instruments backed by a bank's credit. Answer A is correct. Answer B is incorrect; a teller's check is a bank-issued instrument, not a check written by a teller on a customer's personal account. Answer C is incorrect because teller's checks are issued by commercial banks, not the Federal Reserve. Answer D describes a post-dated check, which is an entirely different concept.

Question 11

1. The note is automatically bearer paper.
2. The note is fully negotiable order paper.
3. The note is void and unenforceable.
4. Under a strict technical reading, the note may not qualify as negotiable order paper because the magic words 'to the order of' or 'to bearer' are missing; however, many courts and modern practice treat such instruments as negotiable when the intent is clear. (correct answer)

Explanation: Under a strict reading of UCC Section 3-104, a negotiable instrument must be 'payable to order or to bearer.' This has historically required the specific words 'pay to the order of [name]' or 'pay to bearer.' A note that simply says 'pay to John Doe' without 'order' or 'bearer' language may technically fail this requirement under strict interpretation. However, many jurisdictions and courts have moved toward a more liberal interpretation recognizing intent-based negotiability. The modern trend accepts such instruments as negotiable, but under strict traditional analysis, the absence of the magic words is a problem. Answer A is incorrect because it lacks bearer language. Answer B overstates the traditional rule. Answer C is incorrect because the note is still enforceable as a contract.

Question 12

1. A cashier's check is not a negotiable instrument because the bank is both the drawer and the drawee.
2. A cashier's check is a promissory note because the bank promises to pay.
3. A cashier's check is a check in which the bank is both the drawer and the drawee; it is a primary obligation of the bank and is considered more secure than a personal check. (correct answer)
4. A cashier's check can be stopped by the bank at any time without liability.

Explanation: A cashier's check is a check drawn by a bank (as drawer) on itself (as drawee), payable to a specified payee. Because the bank is the obligor, the cashier's check represents a direct obligation of the bank rather than a customer's obligation. This makes it more secure than a personal check. It is a negotiable instrument under UCC Article 3. Answer A is incorrect because the fact that the bank is both drawer and drawee does not destroy negotiability; it makes it a primary bank obligation. Answer B is incorrect because it is a draft (a type of check), not a promissory note. Answer D is incorrect because banks have very limited rights to stop payment on cashier's checks.

Question 13

1. The restrictive endorsement converts the check to a non-negotiable instrument.
2. The restrictive endorsement limits the use of the check to deposit into an account, and a bank that pays contrary to the restriction may be liable. (correct answer)
3. The restrictive endorsement has no legal effect and the check may be cashed freely.
4. The restrictive endorsement automatically deposits the check into the endorser's account.

Explanation: Under UCC Section 3-206, a restrictive endorsement such as 'For Deposit Only' or 'Pay Any Bank' limits the further negotiation of the instrument. The instrument must be applied consistently with the restriction. A depositary bank (or any bank in the chain of collection) that pays the check contrary to the restriction may be liable for conversion. Answer A is incorrect because the check remains negotiable (as it can be transferred) but restricted in its application. Answer C is incorrect because restrictive endorsements have legal effect on banks. Answer D is incorrect because the endorsement does not automatically deposit the check; it must be presented to a bank for deposit.

Question 14

1. No, because 'after sight' is a contingency.
2. No, because 'ninety days' is too vague a time period.
3. Yes, if the note is payable to bearer.
4. Yes, 'after sight' means after the instrument is presented and accepted (or seen); once presented, the definite time becomes certain, and UCC Section 3-108 recognizes such instruments as payable at a definite time. (correct answer)

Explanation: Under UCC Section 3-108(a)(ii), an instrument is payable at a definite time if it is payable at a fixed period after sight or acceptance. 'Ninety days after sight' means 90 days after the instrument is presented to the drawee. The time becomes certain upon presentment, and such instruments are expressly recognized as payable at a definite time. Answer A is incorrect because 'after sight' is a recognized definite time mechanism in commercial paper law. Answer B is incorrect because '90 days' is a clear and calculable period. Answer C is incorrect because the order/bearer status is irrelevant to the definiteness of time.

Question 15

1. No, because payment at the maker's discretion is neither on demand nor at a definite time - it makes payment uncertain and destroys negotiability. (correct answer)
2. Yes, because the maker has agreed to pay.
3. Yes, because any payment promise satisfies the time requirement.
4. No, but only if the note is for more than $10,000.

Explanation: Under UCC Section 3-108, an instrument must be payable on demand (payable when presented, or containing no time of payment) or at a definite time. Payment 'at the maker's discretion' is neither - it makes payment entirely contingent on the maker's willingness, creating an uncertain and indefinite time of payment that destroys negotiability. Answer B is incorrect because the maker's general agreement to pay is insufficient if the time is indefinite. Answer C is incorrect because not just any payment promise satisfies the requirement; the time must be definite or on demand. Answer D is incorrect because there is no dollar threshold for this requirement.

Question 16

1. Yes, because it contains the words 'to the order of.'
2. No, because the payee is not identified at the time the note is issued; a payee must be identifiable with reasonable certainty at issuance, and a future designation by the maker does not satisfy this requirement. (correct answer)
3. Yes, because the employee will eventually be identified when the maker makes the designation.
4. No, but it qualifies as bearer paper because no specific person is named.

Explanation: Under UCC Section 3-110, the payee of an instrument must be identifiable with reasonable certainty, and the person to whom an instrument is payable is determined by the intent of the signer at the time of signing. An instrument payable to 'an employee to be designated by the maker' fails this requirement because no specific person is identifiable at issuance - the payee depends on a future act by the maker that has not yet occurred. Without an identified payee, the instrument is not valid order paper. It is also not bearer paper because it does not contain bearer language. The instrument fails the payable-to-order-or-bearer requirement for negotiability. Answer B is correct. Answer A is incorrect because the presence of 'to the order of' alone is insufficient if the payee is not identified. Answer C is incorrect because negotiability is determined at the time of issuance, not at some future time when the payee may be designated. Answer D is incorrect because the instrument does not contain bearer language and cannot qualify as bearer paper.

Question 17

1. Yes, because it contains an amount, a payee, and a signature.
2. Yes, because conditions are permitted in a promissory note.
3. Yes, if Pat Jones endorses it to someone else.
4. No, because the promise to pay is conditional on Pat Jones completing the carpentry work; a negotiable instrument must contain an unconditional promise or order to pay. (correct answer)

Explanation: Under UCC Section 3-106, the unconditional requirement for negotiability means the instrument's payment cannot depend on a condition precedent. The phrase 'provided that Pat Jones completes the carpentry work' makes payment conditional on the completion of services - this is an express condition that destroys the unconditional payment requirement and makes the instrument non-negotiable. Answer A is incorrect because these elements alone are insufficient if the promise is conditional. Answer B is incorrect because the UCC prohibits express conditions to payment in negotiable instruments. Answer C is incorrect because endorsement cannot cure a fundamental defect in negotiability.

Question 18

1. Maker: the person writing the check; Payee: the person receiving payment; Drawee: the federal government.
2. Drawer: the person writing the check; Drawee: First National Bank; Payee: the person to whom the check is made payable. (correct answer)
3. Drawer: First National Bank; Drawee: the person writing the check; Payee: the recipient.
4. Maker: First National Bank; Acceptor: the payee; Endorser: the drawer.

Explanation: A check is a type of draft with three parties: the drawer (the person who writes the check and has the account at the bank), the drawee (the bank on which the check is drawn - First National Bank), and the payee (the person to whom the check is made payable). The drawer orders the drawee bank to pay the payee from the drawer's account. Answer A uses 'maker' (a promissory note term) incorrectly and misidentifies the drawee. Answer C reverses the roles of drawer and drawee. Answer D uses incorrect terminology for a check.

Question 19

1. No one; the check is void because the payee does not exist.
2. Only the drawer of the check.
3. Any person may endorse as the fictitious payee because the check is treated as bearer paper; the forged endorsement of a fictitious payee is effective. (correct answer)
4. The check may only be cashed at the drawer's bank.

Explanation: Under UCC Section 3-110(a) and the fictitious payee rule (Section 3-404), if an instrument is payable to a fictitious payee (one whom the drawer does not intend to have an interest), or to a real person whom the drawer did not intend to have any interest, an endorsement by any person in the fictitious payee's name is treated as the payee's own endorsement and is effective. The instrument functions as bearer paper. This rule shifts the loss to the drawer who named a fictitious payee. Answer A is incorrect because the check is not void; the fictitious payee rule addresses its negotiability. Answer B is incorrect because anyone may endorse in the fictitious name. Answer D is incorrect because there is no such restriction.

Question 20

1. Certification discharges the drawer's obligation, and only the bank is liable.
2. Certification means the bank endorses the check but the drawer remains primarily liable.
3. Certification is the bank's acceptance of the check, making the bank primarily and absolutely liable; when a holder procures certification, the drawer and prior endorsers are discharged. (correct answer)
4. Certification has no effect on liability; it merely confirms the check is authentic.

Explanation: Under UCC Section 3-409 and 3-414(c), when a bank certifies a check, it accepts the instrument and becomes primarily liable for its payment. When the holder (payee or endorsee) obtains the certification, the drawer and any prior endorsers are discharged from their secondary obligations because the holder has elected the bank as the primary obligor. When the drawer obtains certification, the drawer is not discharged. Answer A is incorrect in stating only the bank is liable - the discharge of the drawer depends on who obtained the certification. Answer B is incorrect because the bank becomes primarily liable, not merely an endorser. Answer D is incorrect because certification has significant legal effects beyond authentication.