August TIF Ch12

Chapter 12: Financing
True or False Questions
1. A bill of exchange is an unconditional written order.
Answer: True
Diff: 1
Topic: Bills of Exchange
Skill: Legal Concepts
2. The common law does not require a bill of exchange to be dated.
Answer: True
Diff: 2
3. A bill of exchange that is payable at a definite future time is known as a sight bill.
Answer: False
Diff: 1
4. In a trade acceptance, the drawer is ordered to pay a specified sum of money to the
drawee.
Answer: False
Diff: 1
5. In a promissory note, the party who promises to pay is called the payee.
Answer: False
Diff: 1
Topic: Promissory Notes
6. The common law requires a note to contain the words promissory note.
Answer: False
Diff: 1
7. Notes that are secured by personal property are referred to as collateral notes.
Answer: True
Diff: 1
8. To be negotiable, a bill or note must contain a promise by the drawer to make payment.
Answer: True
Diff: 1
Topic: Negotiability of Bills and Notes
9. Any reference to some other agreements in a note would make it non-negotiable.
Answer: False
Diff: 2
10. Negotiation is the transfer of a bill or note in such a way that the recipient becomes a
holder.
Answer: True
Diff: 1
Topic: The Negotiation and Transfer of Bills and Notes
11. An order bill is a bill or note that contains a special endorsement as its last
endorsement.
Answer: True
Diff: 1
12. All restrictive endorsements prevent the further transfer or negotiation of a bill or
note.
Answer: False
Diff: 2
13. In a conditional endorsement, no subsequent holder has the right to enforce the
payment against a conditional endorser until the condition is met.
Answer: True
Diff: 1
14. Under the ULB, only banks can become holders of an endorsement for collection.
Answer: False
Diff: 2
15. The ULB treats an endorsement prohibiting further endorsements as if it were a

qualified endorsement.
Answer: True
Diff: 1
16. In most common law countries, the person best able to prevent the forgery from
happening is held liable for a forged instrument.
Answer: True
Diff: 1
17. According to the fictitious payee rule, when the instrument is issued in the name of a
fictitious payee, the person purporting to be that payee can make an effective
endorsement.
Answer: True
Diff: 1
18. Liability on the instrument for drawers, endorsers, and accommodation endorsers is
primary.
Answer: False
Diff: 1
19. Parties with secondary liability to an instrument can only be sought after the
instrument has been dishonored.
Answer: True
Diff: 1
20. The laws in the United States allow warranty liability on negotiable instruments.
Answer: True
Diff: 1
21. A letter of credit is an instrument issued by a bank, or another person, at the request
of an account party.
Answer: True
Diff: 1
Topic: Letters of Credit
22. An advising bank assumes no liability for paying the letter of credit.
Answer: True
Diff: 1
23. In a letter of credit transaction, an advising bank is entitled to reimbursement from the
issuing bank if the documents it receives are in order.
Answer: False
Diff: 1
24. Barter is an example of a countertrade.
Answer: True
Diff: 1
Topic: Countertrade
25. Tolling is a type of countertrade which involves the exchange of a monetary debt for
another form of debt, such as an equity share or an obligation to deliver products, goods,
or services.
Answer: False
Diff: 1
Topic: Countertrade
Multiple Choice Questions
26. A ________ is an instrument issued by a warehouseman or carrier to a shipper that

serves as a receipt for goods shipped, as evidence of the contract of carriage, and as a
document of title for the goods.
A. bill of lading
B. deed
C. letter of credit
D. certificate of deposit
Answer: A
Diff: 1
Topic: Bills of Lading
27. A(n) ________ is a written, dated, and signed three-party instrument containing an
unconditional order by a drawer that directs a drawee to pay a definite sum of money to a
payee on demand or at a specified future date.
A. codicil
B. promissory note
C. deed
D. bill of exchange
Answer: D
Diff: 1
28. In a draft transaction, if the drawee is a bank, then the draft is referred to as a
________.
A. promissory note
B. check
C. trade acceptance
Answer: B
Diff: 1
29. A bill involved in a draft transaction is considered a note ________.
A. if the drawer owes money to the drawee

B. if the drawee is drawers buyer
C. if the drawee is a borrower of the drawer
D. if the drawer has kept money with the drawee for safeguarding
Answer: C
Diff: 2
30. In a draft transaction, if the drawee is a buyer of the drawer, then the draft is referred
to as a ________.
A. promissory note
B. certificate of deposit
C. trade acceptance
D. check
Answer: C
Diff: 1
31. Which of the following is true of a bill of exchange?
A. It is not considered a negotiable instrument.

B. It is also referred to as a draft.
C. It is a two-party instrument.
D. It contains a conditional order from the drawer that directs the drawee to pay a definite
sum of money to a payee on demand or at a specified future date.
Answer: B
Diff: 3
32. With regard to the form requirements for bills of exchange, the ULB differs from the
common law in that the ULB requires the instrument to be ________.
A. in writing
B. payable to order
C. payable to bearer
D. dated
Answer: D
Diff: 2
33. With regard to the form requirements for bills of exchange, the ULB is similar to the
common law in that both require the instrument to ________.
A. state the place where the instrument was drawn

B. state the place where payable
C. contain the term Bill of Exchange
D. be in writing
Answer: D
Diff: 2
34. The bill of exchange that is payable at the time it is presented or at a stated time after
presentment is known as a(n) ________.
A. deed
B. allonge
C. sight bill
D. time bill
Answer: C
Diff: 1
35. Which of the following terms refers to a bill of exchange on which the drawer and the
payee are the same person?
A. trade acceptance
B. deed
C. codicil
Answer: A
Diff: 1
36. Which of the following is true of checks?
A. It is a two-party instrument.
B. It is always payable on demand.
C. It requires that the drawer is holding the drawees money.
D. It necessitates that the seller has to be both the drawer and the payee.
Answer: B
Diff: 3
37. A promissory note differs from a bill of exchange in that a promissory note ________.
A. cannot have a fixed date for payment

B. is not a written order to pay
C. is a two-party instrument
D. is always paid on demand
Answer: C
Diff: 2
38. When a bank is the maker promising to repay money it has received, plus interest, the
promissory note is called a ________.
A. check
B. letter of credit
C. deed
Answer: D
Diff: 1
39. A(n) ________ is a person who has physical possession of a bill or note that was
drawn, issued, or endorsed to him or her, or to his or her order, or to the bearer, or in
blank
A. accommodation endorser
B. holder
C. assignor
D. acceptor
Answer: B
Diff: 1
40. A drawee of a bill who, by signing the bill on its face, agrees to pay the bill when it is
due is referred to as a(n) ________.
A. accommodation party
B. acceptor
C. holder in due course
D. holder
Answer: B
Diff: 1
41. Which of the following definitions describes an endorsee of a note?
A. a person who endorses a bill or note as a guarantor

B. a person to whom a bill or note is to be paid
C. a person who receives an endorsed note from an endorser
D. a payee who has endorsed and delivered a note to an endorser
Answer: C
Diff: 2
42. Under common law, a person who acquires a bill or note for value, in good faith, and
without notice that it is defective, overdue, or that any person has a claim to or defense
against it is referred to as a(n) ________.
A. holder in due course

B. accommodation endorser
C. aval
D. acceptor
Answer: A
Diff: 1
43. Which of the following definitions describes an accommodation party of a bill or a

note?
A. a person who receives an endorsed bill or note from an endorser

B. a person who endorses a bill or note as a guarantor of an endorsee
C. a person who signs a bill or note as a surety and comaker
D. a person who signs a bill or note to lend his or her credit to another party
Answer: D
Diff: 2
44. Which of the following definitions describes an aval of a bill or a note?
A. a person who has physical possession of a bill or note that is payable

B. a person who signs a bill or note as a surety and comaker
C. a person who endorses a bill or note as a guarantor of an endorsee
D. a person who signs a bill or note to lend his or her credit to another party
Answer: B
Diff: 2
45. Which of the following definitions describes a drawee to a bill of exchange?
A. the issuer of a bill of exchange

B. a person who signs a bill of exchange or note to lend his or her credit to another party
C. the person ordered to pay a bill of exchange
D. a person who receives an endorsed bill of exchange or note from an endorser
Answer: C
Diff: 2
46. The person who issues a bill of exchange is referred to as a ________.

A. payee
B. drawee
C. drawer
D. endorser
Answer: C
Diff: 1
47. According to common law, which of the following is true of payment in a negotiable
instrument?
A. It has to be paid in the currency of the country in which it was issued.

B. It cannot be made in installments.
C. It should be ascertainable from the instrument itself.
D. It can be paid in a nonmonetary mode of payment.
Answer: C
Diff: 3
48. Both the common law and the ULB specify that ________.
A. the amount in the instrument can be paid in installments

B. the sum paid for the negotiable instrument must be money
C. the amount to be paid in an instrument is subject to variable interest rates
D. the instrument need not be signed to be considered negotiable
Answer: B
Diff: 2
49. The Uniform Law on Bills of Exchange and Promissory Notes (ULB) differs from the
Uniform Commercial Code in that the ULB ________.
A. does not allow for variable interest rates

B. allows payments to be made in installments
C. allows nonmonetary modes of payments
D. does not allow external references for payment amount
Answer: A
Diff: 2
50. Common law differs from the Uniform Law on Bills of Exchange and Promissory
Notes (ULB) in that the common law ________.
A. does not allow external references for payment amount

B. does not allow for variable interest rates
C. allows nonmonetary modes of payments
D. allows payments to be made in installments
Answer: D
Diff: 2
51. The transfer of all or some of the rights under a contract is called a(n) ________.
A. assignment
B. allonge
C. endorsement
D. restrictive endorsement
Answer: A
Diff: 1
52. A bearer paper is different from an order paper in that a bearer paper ________.
A. cannot be negotiated
B. is negotiated by endorsement and delivery
C. is negotiated by delivery alone
D. is negotiated by endorsement alone
Answer: C
Diff: 1
53. A bearer paper can be converted to an order paper ________.
A. by the use of a bill of lading

B. by an endorsement to pay to the bearer
C. by an endorsement in blank
D. by the use of a special endorsement
Answer: D
Diff: 2
54. An endorsement in which the endorser does not guarantee that an instrument will be
accepted and paid by the drawer or maker is referred to as a ________.
A. conditional endorsement
B. restrictive endorsement
C. qualified endorsement
D. special endorsement
Answer: C
Diff: 1
55. Which of the following types of endorsements payment depends on the occurrence of
an event?
A. qualified endorsement
B. conditional endorsement
C. agency endorsement
D. special endorsement
Answer: B
Diff: 1
56. Which of the following written endorsements would be an example of an

endorsement prohibiting further endorsement?
A. Pay to Elaine, without recourse, [signed] John

B. For collection only, [signed] John
C. Pay to Elaine only, [signed] John
D. Pay to Elaine, agent for John [signed] John
Answer: C
Diff: 3
57. Which of the following is a similarity between a qualified endorsement and an

endorsement prohibiting further endorsement under the ULB?
A. In both the endorsements, the endorsee has no rights against the endorser.
B. In both the endorsements, the endorsee is considered a holder of the instrument.
C. In both the endorsements, the endorsee is considered a collecting agent for the
endorser.
D. In both the endorsements, the endorsee has no rights against endorser until a stipulated
condition is met.
Answer: A
Diff: 3
58. For which of the following types of endorsements is there a difference in endorsee
status between the ULB and common law?
A. conditional endorsement
B. collection endorsement
C. agency endorsement
D. endorsement prohibiting further endorsement
Answer: D
Diff: 2
59. The ________ is the production of an instrument to a party liable to pay on it for that
partys acceptance or payment.
A. accommodation of the instrument

B. presentment of the instrument
C. issuance of the instrument
D. endorsement of the instrument
Answer: B
Diff: 1
60. In which of the following cases can the holder of an instrument seek recourse from
the parties with secondary liability?
A. if the instrument has been physically damaged

B. if the instrument is not presented on time
C. if the instrument has been dishonored
D. if the instrument is found to be forged
Answer: C
Diff: 2
61. A ________ is an instrument issued by a bank or another person at the request of an

account party that obliges the issuer to pay to a beneficiary a sum of money within a
certain period of time upon the beneficiarys presentation of documents specified by the
account party.
A. bill of lading
B. cashiers check
C. certificate of deposit
D. letter of credit
Answer: D
Diff: 1
62. In a ________ letter of credit, a credit is obtained by a seller naming the buyer as the
beneficiary.
A. standby
B. red clause
C. revolving
D. transferable
Answer: A
Diff: 1
63. Which of the following financial institutions of the World Bank provides funds to
private companies?
A. the International Development Association

B. the International Bank for Reconstruction and Development
C. the International Finance Corporation
D. the International Centre for Settlement of Investment Disputes
Answer: C
Diff: 1
Topic: Financing Foreign Operations
64. Which of the following would be an example of a countertrade?
A. a country exchanging its agricultural exports for oil from another country
B. a country selling its electronic products through a retail chain in another country
C. a country pledging some of its gold deposits as security for obtaining a loan from a
financial institution
D. a country buying food reserves from another country
Answer: A
Diff: 2
Topic: Countertrade
65. ________ is a type of countertrade in which a foreign supplier employs a processor to

process raw materials that the processor cannot afford to purchase. The supplier then sells
the processed goods to a third party to pay for the processing.
A. Buyback
B. Offset
C. Swap
D. Tolling
Answer: D
Diff: 1
Topic: Countertrade
Essay Questions
66. What are the requirements placed on the form of a bill of exchange under the ULB?
Answer: The ULB requires that a bill (1) should be in writing, (2) should be payable to
order or to bearer, (3) contain the term bill of exchange in the body and language of the
check, (4) state the place where the bill is drawn, (5) state the place where payment is to
be made, and (6) be dated.
Diff: 2
67. What features should be present in a bill so that it meets promissory requirements?
Answer: To be negotiable, a bill or note must (1) be in the proper form and (2) contain a
promise by the maker or drawer to make payment.
To meet the promissory requirements, a bill or note must do the following:
1. State an unconditional promise or order to pay.
2. State a definite sum of money or a monetary unit of account.
3. Be payable on demand or at a definite time.
4. Be signed by the maker or drawer.
Diff: 2
68. Describe the unconditionality feature of a bill or note.
Answer: The promise or order to pay made in a bill or note cannot be conditioned upon
the performance of some other obligation. The reason for this is basic to the concept of
negotiability. If the holder of a bill or note had to determine whether a collateral promise
had or had not been fulfilled, the utility of these instruments would be greatly reduced.
Diff: 1
69. Describe the ways in which a bill or note can be paid.
Answer: For a bill or note to function reliably in commerce, the time when it is payable
has to be on demand or ascertainable from its face. The time requirement actually serves
several functions. It tells the maker, drawee, accommodation maker, or acceptor when he
is required to pay. It allows secondary parties, such as drawers, endorsers, and
accommodation endorsers, to determine the date when their obligations arise. It
establishes when the statute of limitations will run. And finally, with interest bearing bills
or notes, it defines the period for calculating the present value of the instrument.
Diff: 2
70. What is a bearer paper?
Answer: Bearer paper is an instrument that either (1) contains on its face an order to pay
the bearer or to pay in cash, or (2) contains as its last endorsement a so-called blank
endorsement, that is, the signature of the payee or the signature of the last endorsee
named in a special endorsement. Bearer paper is negotiated by delivery alone. The use of
bearer paper is riskier than the use of order paper. If it is lost or stolen it must still be
paid.
Diff: 1
71. What is an endorsement? What are the different types of endorsements?

Answer: The act of a payee, drawee, accommodation party, or holder of a negotiable
instrument in signing the back of the instrument, with or without qualifying words, to
transfer rights in the instrument to another is known as endorsement. An endorsement is
required to negotiate a bill or note that is in the form of order paper, and it may optionally
be added to bearer paper. Endorsements are signatures, with or without additional
statements that are commonly written on the back of the instrument. There are four basic
kinds: (1) special endorsements, (2) blank endorsements, (3) qualified endorsements, and
(4) restrictive endorsements.
Diff: 2
72. Describe the two major rules that limit a makers excuse not to pay for forged
instruments.
Answer: There are two major exceptions to the general common law rule that a forged
endorsement is ineffective. One is the imposter rule. This rule provides that when a
drawer, maker, or endorser draws, makes, or endorses an instrument to an imposter, the
imposters subsequent endorsement is effective. The second common law exception to
the rule that a forged signature is ineffective is the fictitious payee rule. This says that
when the instrument is issued in the name of a fictitious payee, the person purporting to
be that payee can make an effective endorsement.
Diff: 2
73. What are the consequences of not obtaining a letter of credit?
Answer: When a buyer and seller enter into a contract and the buyer agrees to obtain a
letter of credit (or a seller agrees to obtain a standby letter of credit), the consequences of
failure to do so depend on whether the letter was (1) a condition precedent to the
formation of the contract or (2) a condition for the performance of the contract.
In the first case, there will be no contract and consequently no breach. In the second,
because the contract already exists, the failure to obtain a letter of credit will be a breach
that will entitle the injured party to sue for damages.
Diff: 2
74. Explain the role of the advising bank in a letter of credit transaction.
Answer: Once a bank issues a letter of credit, it will commonly deliver the credit to a
correspondent bank located in the beneficiarys county, which will in turn deliver the
credit to the beneficiary. The correspondent, formally known as an advising bank,
assumes no liability for paying the letter of credit. Its only obligation is to the issuing
bank, to ensure that the beneficiary is advised and the credit delivered, and to take
reasonable care to check the apparent authenticity of the credit. It does this by
comparing the signature on the credit with the authorized signatures it maintains on file.
Diff: 1
75. What are the rights and responsibilities of the account party in a letter of credit
transaction?
Answer: The account partys rights and obligations are based on two contracts: the
underlying contract with the beneficiary (usually the seller) and the contract with the
issuing bank relating to the letter of credit. Ordinary contract law determines the account
partys rights under the first contract. International practice limits the account partys
rights under the second contract. The main limitation on an account partys rights under
the contract with the issuing bank is the doctrine of privity. That is, because the account
party is in privity (i.e., in a contractual relationship) only with the issuing bank, it can
look only to the issuing bank for performance. In other words, it has no right to bring an
action against the advising or confirming banks based on their contract with the issuing
bank.
Diff: 2

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August TIF Ch12

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Chapter 12: Financing

True or False Questions

1. A bill of exchange is an unconditional written order.

2. The common law does not require a bill of exchange to be dated.

9. Any reference to some other agreements in a note would make it non-negotiable.

15. The ULB treats an endorsement prohibiting further endorsements as if it were a

24. Barter is an example of a countertrade.

Multiple Choice Questions

26. A ________ is an instrument issued by a warehouseman or carrier to a shipper that

29. A bill involved in a draft transaction is considered a note ________.

A. if the drawer owes money to the drawee

31. Which of the following is true of a bill of exchange?

A. It is not considered a negotiable instrument.

A. state the place where the instrument was drawn

36. Which of the following is true of checks?

A. cannot have a fixed date for payment

41. Which of the following definitions describes an endorsee of a note?

A. a person who endorses a bill or note as a guarantor

A. holder in due course

43. Which of the following definitions describes an accommodation party of a bill or a

A. a person who receives an endorsed bill or note from an endorser

44. Which of the following definitions describes an aval of a bill or a note?

A. a person who has physical possession of a bill or note that is payable

45. Which of the following definitions describes a drawee to a bill of exchange?

A. the issuer of a bill of exchange

46. The person who issues a bill of exchange is referred to as a ________.

A. It has to be paid in the currency of the country in which it was issued.

A. the amount in the instrument can be paid in installments

A. does not allow for variable interest rates

A. does not allow external references for payment amount

53. A bearer paper can be converted to an order paper ________.

A. by the use of a bill of lading

56. Which of the following written endorsements would be an example of an

A. Pay to Elaine, without recourse, [signed] John

57. Which of the following is a similarity between a qualified endorsement and an

A. accommodation of the instrument

A. if the instrument has been physically damaged

61. A ________ is an instrument issued by a bank or another person at the request of an

A. the International Development Association

65. ________ is a type of countertrade in which a foreign supplier employs a processor to

68. Describe the unconditionality feature of a bill or note.

69. Describe the ways in which a bill or note can be paid.

70. What is a bearer paper?

71. What is an endorsement? What are the different types of endorsements?

73. What are the consequences of not obtaining a letter of credit?

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