What is a negotiable instrument that is accepted by the bank only upon the approval of the payor?

Question

Options

• Acash flow
• Bdraft
• Ccheck
• Dwire transfer

• A
  5% (1)
• B
  81% (17)
• C
  10% (2)
• D
  5% (1)

Explanation

Option B (draft) is correct because a draft - also called a bill of exchange - is a written order from a drawer (payor) directing a drawee (typically a bank) to pay a specified amount to a payee. The bank only accepts and honors the instrument once it has been formally authorized by the payor, making it conditional on payor approval.

Cash flow (A) is not a negotiable instrument at all - it refers to the movement of money in and out of a business, a financial concept rather than a payment document. A check (C) is actually a special type of draft, but it is payable on demand upon presentation and does not require formal bank acceptance prior to payment - so it is too narrow and doesn't fit the "accepted upon payor approval" description. Wire transfer (D) is an electronic funds transfer, not a negotiable instrument - it cannot be endorsed or transferred like a draft can.

Memory tip: Think of a draft as a request that needs a stamp of approval - the bank must formally "accept" it (hence the related term banker's acceptance) based on the payor's go-ahead, unlike a check which is simply cashed on the spot.

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