National Real Estate Practice Exam

What is one characteristic of a negotiable instrument?

1. It must be signed by the lender

2. It is non-transferable

3. It must include a legal description of the property

4. It can be transferred from one party to another

The correct answer is: It can be transferred from one party to another

A negotiable instrument is defined by its ability to be easily transferred from one party to another. This characteristic allows the holder of the instrument to assign or endorse it to a third party, who then acquires the rights to the instrument. This feature is crucial as it enables liquidity in transactions, allowing instruments like checks, promissory notes, and certain types of contracts to efficiently circulate in various financial systems. In contrast, the other options reflect characteristics that do not align with the nature of negotiable instruments. For example, a signature from the lender is not a necessity for an instrument to maintain its negotiability; it is the intent and clear terms outlined in the document that matter. Furthermore, negotiable instruments must be transferable; thus, calling them non-transferable is inaccurate. Lastly, while legal descriptions of property may be essential in certain real estate documents, they are not a requirement for a negotiable instrument to be valid. The emphasis on transferability is what primarily defines the utility and function of negotiable instruments in commerce.