Test Bank for The U.S.

Banking System 3rd Edition

Test Bank for The U.S. Banking System 3rd Edition

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Name: Class: Date:

CHAPTER 06—NEGOTIABLE INSTRUMENTS

1. The most common form of negotiable instrument is a promissory note.
a. True
b. False
ANSWER: False
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.1.1 - LO: 6.1.1

2. Check use in the United States is beginning to decline.

a. True
b. False
ANSWER: True
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.1.1 - LO: 6.1.1

3. A check must be written on paper in order to be legal.

a. True
b. False
ANSWER: False
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.2.1 - LO: 6.2.1

4. A check cannot be negotiated until it has been endorsed.

a. True
b. False
ANSWER: True
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.2.2 - LO: 6.2.2

5. A full endorsement limits both the transferability and the further negotiability of a check.
a. True
b. False
ANSWER: False
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.2.2 - LO: 6.2.2

6. It is illegal for a bank to make different check-cashing rules for customers and noncustomers.
a. True
b. False
ANSWER: False
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.2.2 - LO: 6.2.2

7. The Federal Reserve clears about 90 percent of the checks written in the U.S.
a. True
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Name: Class: Date:

CHAPTER 06—NEGOTIABLE INSTRUMENTS

b. False
ANSWER: False
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.3.2 - LO: 6.3.2

8. You must pay off your credit card account in full at the end of every month.
a. True
b. False
ANSWER: False
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.4.1 - LO: 6.4.1

9. Transit numbers are not issued to financial institutions that hold accounts at a Federal Reserve Bank.
a. True
b. False
ANSWER: False
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.3.1 - LO: 6.3.1

10. Under some circumstances, it is legal to write a postdated check.

a. True
b. False
ANSWER: True
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.3.2 - LO: 6.3.2

11. Which of the following features of a check indicates who is to receive the funds?
a. the bearer
b. the signature
c. the payee
d. the memo
ANSWER: c
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.1.2 - LO: 6.1.2

12. The person who signs a draft is the

a. drawee.
b. drawer.
c. payee.
d. bearer.
ANSWER: b
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.1.2 - LO: 6.1.2

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Name: Class: Date:

CHAPTER 06—NEGOTIABLE INSTRUMENTS

13. Which of the following is NOT an element of negotiability?
a. must contain a signature
b. must be written
c. must be payable on demand
d. must state the amount to be paid
ANSWER: c
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.2.1 - LO: 6.2.1

14. The term negotiation, as it applies to a negotiable instrument, applies to

a. the ability of the holder to obtain its value.
b. the conditions of the instrument.
c. the terms of the instrument.
d. all of the above.
ANSWER: a
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.2.1 - LO: 6.2.1

15. Which of the following endorsements is the least secure?

a. qualified endorsement
b. full endorsement
c. restrictive endorsement
d. blank endorsement
ANSWER: d
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.2.2 - LO: 6.2.2

16. Which of the following is an example of a restrictive endorsement?

a. “For Deposit Only”
b. the signature of the holder
c. “Pay to the Order of Tevin Washington”
d. “Pay to the Order of Jill Davies, without recourse”
ANSWER: a
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.2.2 - LO: 6.2.2

17. Which of the following largely eliminated the wide variation of legal regulation from the country’s payments system?
a. Federal Reserve Act of 1913
b. Uniform Commercial Code of 1958
c. National Banking Act of 1864
d. Expedited Funds Availability Act of 1987
ANSWER: b
POINTS: 1
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CHAPTER 06—NEGOTIABLE INSTRUMENTS

LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.3.1 - LO: 6.3.1

18. Which of the following directly transfers money from a person’s account to the account of a retailer?
a. charge card
b. credit card
c. debit card
d. cash card
ANSWER: c
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.4.1 - LO: 6.4.1

19. The 9-digit number printed on a check that identifies the bank that holds the checking account and is responsible for
payment is called the
a. transit number.
b. account number.
c. check number.
d. NSF number.
ANSWER: a
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.3.2 - LO: 6.3.2

20. Marisol has written a $500 check to Stephen, but she has only $300 in her account and it is returned unpaid to
Stephen. Marisol has written a
a. floating check.
b. promissory note.
c. postdated check.
d. bounced check.
ANSWER: d
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.3.2 - LO: 6.3.2

21. A written order or promise to pay a sum of money is called a(n) ____________________ instrument.
ANSWER: negotiable
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.1.1 - LO: 6.1.1

22. A(n) ____________________ instrument is payable to whoever holds it.

ANSWER: bearer
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.1.2 - LO: 6.1.2

23. A bill of ____________________ is a negotiable and unconditional written order addressed by one party to another.
ANSWER: exchange
POINTS: 1
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CHAPTER 06—NEGOTIABLE INSTRUMENTS

LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.1.2 - LO: 6.1.2

24. A short-term note or draft issued by a corporation or government is called ____________________ paper.
ANSWER: commercial
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.1.2 - LO: 6.1.2

25. A(n) ____________________ endorsement transfers a check to another specified party.

ANSWER: full
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.2.2 - LO: 6.2.2

26. When the same funds are counted in two depository banks, the funds are called ____________________.
ANSWER: float
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.3.2 - LO: 6.3.2

27. A(n) ____________________ card allows a consumer to make purchases, but the account must be paid in full at the
end of the month.
ANSWER: charge
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.4.1 - LO: 6.4.1

28. ____________________ cards have embedded microchips and use embedded logic to change and store values and
record transactions.
ANSWER: Smart
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.4.1 - LO: 6.4.1

29. Online systems called _________________________ allow consumers to pay each other directly for a product.
ANSWER: person-to-person (P2P) payments
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.4.1 - LO: 6.4.1

30. A(n) ____________________ check is a check that is dated later than the date on which it is actually written.
ANSWER: postdated
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.3.2 - LO: 6.3.2

31. This morning Terran had a balance in his checking account of $208.68. During the day he wrote two checks: one to
his friend George for $23.00 and one to the comic book shop for $13.75. What is his account balance at the end of the
day?
ANSWER: $171.93
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.1.2 - LO: 6.1.2
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Name: Class: Date:

CHAPTER 06—NEGOTIABLE INSTRUMENTS

32. Mrs. Rodriguez had $1,306.35 in her bank account on December 1. On December 3, she deposited her paycheck of
$1,500.00. On December 4, she wrote four checks in the following amounts: $35.65, $204.55, $216.76, and $23.42. She
made an ATM withdrawal of $50 on December 5. What is her account balance the morning of December 6?
ANSWER: $2,275.97
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.1.2 - LO: 6.1.2

33. This morning Clarissa had a balance in her checking account of $1765.98. She wrote three checks: one to the baker for
$74.68, one to the florist for $54.39, and one to her mother for $500. She also took her $750 paycheck to the bank and
deposited half of it into her account; the other half she took as cash. What is her account balance at the end of the day?
ANSWER: $1,511.91
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.1.2 - LO: 6.1.2

34. What three things are shown by a check’s identification numbers?

ANSWER: A check’s identification numbers show (1) the check number (2) the bank routing number,
and (3) the account number.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.1.2 - LO: 6.1.2

35. What is a promissory note?

ANSWER: A promissory note is a written promise to pay at a fixed or determinable future time a sum of
money to a specified individual.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.1.2 - LO: 6.1.2

36. Define the term elements of negotiability and list the six elements.
ANSWER: Elements of negotiability are legal requirements all negotiable instruments must meet.
Negotiable instruments must (1) be written, (2) be signed, (3) make an unconditional promise
or order to pay, (4) state clearly the amount to be paid, (5) be payable on demand or at a
defined time, and (6) contain words of negotiation.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.2.1 - LO: 6.2.1

37. Why do banks encourage the use of cash cards?

ANSWER: Banks encourage the use of cash cards because they are less expensive than human tellers
and are usually available 24 hours a day.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.4.1 - LO: 6.4.1

38. Define biometrics and provide two examples of biometrics.

ANSWER: Biometrics refers to using a distinct individual characteristic to uniquely identify a specific
person. Examples may include two of the following: fingerprints, retina scans, and voice
recognition.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.4.1 - LO: 6.4.1
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Name: Class: Date:

CHAPTER 06—NEGOTIABLE INSTRUMENTS

39. In banking, who is the holder in due course?
ANSWER: The holder in due course is the person or financial institution that acquires a check or
promissory note received in good faith as payment and who is entitled to payment by the
drawer of the check or note.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.2.1 - LO: 6.2.1

40. What is a draft? When is a draft typically used?

ANSWER: A draft is an order signed by one party (the drawer or drafter) that is addressed to another
party (the drawee) directing the drawee to pay to someone (the payee) the amount indicated
on the draft. Drafts are typically used to purchase goods and services when the transaction
goes beyond the bounds of U.S. banking law.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.1.2 - LO: 6.1.2

41. Name and define the four primary types of endorsement. Which is the most commonly used?
ANSWER: A blank endorsement is simply the signature of the holder. A restrictive endorsement limits
the use of the instrument to a means specified by the endorser. A full endorsement transfers
the check to another specified party. A qualified endorsement attempts to limit the liability of
the endorser without limiting an instrument’s further negotiability. The blank endorsement is
the most commonly used.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.2.2 - LO: 6.2.2

42. What is float? Name three specific ways it can be caused. What effect does float have on the money supply?
ANSWER: Float is the occurrence of the same funds being counted in two depository banks.
Malfunction float is caused by machine breakdown. Transportation float refers to delays in
moving checks from one place to another. Holdover float occurs when banks are slow in
processing transactions. Float distorts the money supply by making it appear that more
money is in circulation than is really the case.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.3.2 - LO: 6.3.2

43. What is EFT? Discuss two common forms of EFT. What are the advantages of EFT?
ANSWER: EFT stands for electronic funds transfer. One common form of EFT is direct deposit, in
which funds (from an employer, for example) are sent electronically to the recipient’s bank
rather than sending the recipient a check to cash. Another common form of EFT is automatic
payments, in which a bank makes payments to a specified recipient. Advantages of EFT
include safety, accuracy, and immediate use of the funds.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.4.2 - LO: 6.4.2

44. What is GoDirect and why is it important?

ANSWER: GoDirect encourages recipients of federal funds to receive payments by EFT. If all FMS
disbursements were made by EFT, about $130 million annual savings could be achieved. As
the government is such a large distributor of funds, programs like GoDirect help drive EFT
further into the psyche of American consumers. This makes consumers more receptive to

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CHAPTER 06—NEGOTIABLE INSTRUMENTS

efforts by private employers to encourage direct deposit as well.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.4.2 - LO: 6.4.2

45. What technology enabled Check 21? Describe how this technology achieves costs savings.
ANSWER: Digital imaging technology enabled Check 21. Significant cost savings have been achieved
by eliminating storage, recordkeeping, postage, and labor costs associated with paper checks.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.4.2 - LO: 6.4.2

46. What did the Uniform Commercial Code (UCC) largely eliminate?
ANSWER: The UCC largely eliminated the wide variation of legal regulation that could hamper the
national payments system.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.3.1 - LO: 6.3.1

47. Explain the Uniform Commercial Code (UCC) rules for a postdated check.
ANSWER: The UCC allows a postdated check as long as the bank customer gives the bank advance
notice of the check, including the check number, account number, amount, date, and to whom
the check is payable. If proper notice were given, the bank, not the customer, would be liable
for damages if the check is cashed before the date on the check.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.3.2 - LO: 6.3.2

48. Name and describe the technology used most frequently in the U.S. for contactless payments.
ANSWER: Radio frequency identification (RFID)—also called automatic identification and data capture
(AIDC)—uses a transponder to convey identifying information including the account holder's
account or balance information and the fees being assessed to the account by the business for
products or services.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.4.1 - LO: 6.4.1

49. What is the difference between electronic check conversion and Check 21?
ANSWER: Whereas Check 21 allows banks to transmit images of a check instead of the actual check,
electronic check conversion allows businesses to use the information on a check to initiate an
electronic funds transfer from your account.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.3.1 - LO: 6.3.1

50. Why was the Expedited Funds Availability Act (EFAA) of 1987 passed, and what rules did it direct the Fed to set?
ANSWER: The EFAA was passed to combat an abuse of the check-payment system practiced by a few
banks. It directed the Federal Reserve to set rules (Federal Reserve Regulation CC) that
balanced the needs of consumers with the need for banks to protect themselves from
uncollectible checks.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 6.3.1 - LO: 6.3.1
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Test Bank for The U.S. Banking System 3rd Edition

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CHAPTER 06—NEGOTIABLE INSTRUMENTS

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