Justine A.

Carabata

BSA-212

PROMISSORY NOTES:

 A promissory note is a financial instrument that contains a written promise by one party
(the note's issuer or maker) to pay another party (the note's payee) a definite sum of
money, either on demand or at a specified future date.
 A promissory note typically contains all the terms pertaining to the indebtedness, such
as the principal amount, interest rate, maturity date, date and place of issuance, and
issuer's signature.
 In terms of their legal enforceability, promissory notes lie somewhere between the
informality of an IOU and the rigidity of a loan contract.

Types of Promissory Notes:

*Corporate Credit Promissory Notes

Promissory notes are commonly used in business as a means of short-term financing. For
example, when a company has sold many products but not yet collected payments for them, it
may become low on cash and unable to pay creditors. In this case, it may ask them to accept a
promissory note that can be exchanged for cash at a future time after it collects its accounts
receivables. Alternatively, it may ask the bank for the cash in exchange for a promissory note to
be paid back in the future.Promissory notes also offer a credit source for companies that have
exhausted other options, like corporate loans or bond issues. A note issued by a company in
this situation is at a higher risk of default than, say, a corporate bond. This also means the
interest rate on a corporate promissory note is likely to provide a greater return than a bond
from the same company—high-risk means higher potential returns.These notes usually have to
be registered with the government in the state in which they are sold and/or with the Securities
and Exchange Commission. Regulators will review the note to decide whether the company is
capable of meeting its promises. If the note is not registered, the investor has to do his or her
own analysis as to whether the company is capable of servicing the debt. In this case, the
investor's legal avenues may be somewhat limited in the case of default. Companies in dire
straits may hire high-commission brokers to push unregistered notes on the public.

*Investment Promissory Notes

Investing in promissory notes, even in the case of a take-back mortgage, involves risk. To help
minimize these risks, an investor needs to register the note or have it notarized so that the
obligation is both publicly recorded and legal. Also, in the case of the take-back mortgage, the
purchaser of the note may even go so far as to take out an insurance policy on the issuer's life.
This is perfectly acceptable because if the issuer dies, the holder of the note will assume
ownership of the house and related expenses that he or she may not be prepared to
handle.These notes are only offered to corporate or sophisticated investors who can handle the
risks and have the money needed to buy the note (notes can be issued for as large a sum as the
buyer is willing to carry). After an investor has agreed to the conditions of a promissory note, he
or she can sell it (or even the individual payments from it), to yet another investor, much like a
security.Notes sell for a discount from their face value because of the effects of inflation eating
into the value of future payments. Other investors can also do a partial purchase of the note,
buying the rights to a certain number of payments—once again, at a discount to the true value
of each payment. This allows the note holder to raise a lump sum of money quickly, rather than
waiting for payments to accumulate.

Discounting of Promissory Note

When the promissory note is discounted, the interest is taken off the principal amount
at the beginning of the loan. The borrower pays back the entire amount, even though he only
received the principal minus the interest.