Mike Deposited $100,000 in a Bank and Procured a Certificate

question 16

Multiple Choice

Mike deposited $100,000 in a bank and procured a certificate of deposit on it, payable to himself, for repayment in five years with a five percent interest rate. A year after that, Mike borrowed $25,000 from Jill, and gave her a promissory note to repay it in one year. As collateral, Mike gave Jill the certificate of deposit and asked to put in a prepayment clause, to which Jill agreed. They agreed that Mike could repay in monthly payments, as mentioned in the note. If Mike defaults on the payment even after one year, which of the following is true of the foreclosure options Jill has with the certificate of deposit Mike gave her?

• A) The bank has to pay her only after the five-year period mentioned in the CD.
• B) The bank does not have to pay her for the CD.
• C) The bank has to pay her the difference of $75,000.
• D) The bank has to pay her $25,000 with one year interest of 5 percent on demand.

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Definitions:

Contractual Obligations

Legal duties that arise out of agreements between two or more parties where each has responsibilities to perform as specified in the contract.

Assignment

The transfer of rights, property, or obligations from one party to another.

Delegation

The act of assigning responsibility or authority from one person to another to carry out specific activities.

Incidental Beneficiary

A third party who benefits from a contract between two other parties, albeit without any intention from the contracting parties to benefit the third party.