CREDIT INSTRUMENT 2.
Special endorsement – specifically made
Credit Instrument – an oral agreement to
settle an obligation can be drawn into a written
contract.
2 Specific Characteristics of Credit Instrument:
1. Presence of risk involved in the payment
deferred to a later date
2. The debtor-creditor relationship is stressed.
There are obvious advantages attached
to a credit instrument. The obligation of the
debtor and rights of the creditor are set in clear
and definite terms. The rate of interest charged
is fixed in the contract.
Credit instrument may be transferred to
third parties through negotiation.
Negotiation – the transfer of an instrument in
terms of possession and title. An instrument is
negotiated either by mere delivery or by
endorsement and delivery. If payable to order,
negotiation is affected by both endorsement and
delivery.
For an instrument to be negotiated, it has to:
1. Be put down in writing.
2. Be signed by the maker or drawer.
3. Contain an unconditional promise or order to
pay a definite sum of money.
4. Be payable in demand or at fixed or
determinable future time.
5. Be payable to order or bearer.
Endorsement – of a negotiable instrument
provides a complete record, and, unless an
endorsement is “qualified”, it imposes a
secondary liability upon the endorser in case, for
any reason, the drawee fails to pay.
4 types of Endorsements:
1. Endorsement in blank – transferable when
the credit instrument is “endorsed” or signed on
its reverse side. When the endorsement
appears on the surface of the instrument, it
becomes payable to the bearer.
out in the name of the person to whom it is
transferred.
3. Restricted endorsement – restricted by
writing the phrases “For deposit only” or “For
Person X only”. The endorser affixes his
signature at the back of the paper which stops
being negotiable.
4. Qualified endorsement – limits the liability of
the endorser.
Presentment – proper presentation of the
instrument either for payment or for acceptance.
A check is usually presented to a bank for
encashment. If, however, the instrument is not
payable on demand, the holder brings the same
of the drawee for acceptance after which the
instrument is presented at maturity for payment.
An instrument may be honored or dishonored. If
paid or accepted by the drawee, it is honored.
Credit instruments are classified
according to the acceptability of the
instrument, the form it takes, its function, and
even perhaps its source and the parties
involved, as well as its negotiable character.
As to Acceptability
An instrument may either be of limited or
unlimited acceptance.
Unlimited acceptance – instruments that pass
from hand-to-hand without question as to its
source, and which in effect possess the
characteristics of money.
Limited acceptance – acceptability is predicated
on the credit standing of the issuer.
As to Form
The credit instrument may either be
orders or promises to pay.
Order to pay – the order of one person to
another to pay a third person money on demand
or at a definite future time.
3 Parties involved:
a. Drawer – who gives the order
b. Drawee – who is ordered to pay
c. Payee – who is to receive payment
Promise to pay – a vow of one person to pay
another money on demand or at definite future
time.
2 parties involved:
a. Maker – the person promising to pay
b. Payee – the one to receive payment
Orders to pay or promises to pay are
payable either on demand or at a future
determinable time.
Orders to pay: checks, drafts, acceptances,
postal money orders
Promises to pay: open book accounts,
promissory notes, collateral promissory notes,
letters of credit and bonds
As to Function
Credit instruments are classified into:
a. Credit money – a medium of exchange
b. Commercial credit instruments – facilitates
the use of credit in short-term commercial
pursuits
c. Investment credit instruments – used for
long-term credit
As to Negotiability
Credit instruments are either negotiable
or non-negotiable.
COMMERCIAL CREDIT INSTRUMENTS
Commercial credit instruments are
subdivided into promises to pay or orders to pay.
Promises to Pay
1. Open book account – one of the common
forms of credit instruments, this constitutes the
implied verbal promise of the debtor when he
buys consumable goods on credit.
2. Promissory Notes – an unconditional written
promise of the maker to pay a sum certain in
money to the bearer on order or demand at a
future determinable time.
3. Collateral Promissory Notes
4. Commercial Letters of Credit – a written
promise on the part of the bank to honor drafts
drawn against it or for its account, by a specified
beneficiary or his order, under the specifications
contained in the letter of credit. This instrument
is used widely in financing foreign trade.
Letters of Credit may be classified as follows:
1. According to mode of transmission
a. Circular – opening bank issues a letter
addressed generally to persons or companies
indicating its intention to honor the drafts of
beneficiaries under specified terms.
b. Specially advised – opening bank notifies the
beneficiary directly or through a notifying bank.
2. According to duration of the submission
of credit
a. Revocable – the bank withdraws or modifies
the credit substituted for the buyer by using
phrases as “good until cancelled” or “good until
(a certain period of time)”.
b. Irrevocable – the bank waives its right to
cancel the credit or revoke the same prior to the
date specified.
3. According to obligations assumed by the
bank
a. Confirmed – advising bank assumes the
obligation to perform the undertaking stipulated
in the letter of credit.
b. Unconfirmed – advising bank does not
assume any other obligation except of notifying
the beneficiary.
4. According to method of reimbursement
a. Simple method – opening bank carries an
account in the currency to be paid with the
paying bank.
b. Reimbursement method – paying bank
prefers to receive the reimbursement by draft, or
when the two banks have no interbank
accounts.
5. According to the method of payment
a. Negotiation – payment is termed if it is a
circular letter of credit.
b. Straight – if it is specially advised.
c. Sight – payments are made with sight or
demand drafts.
d. Acceptance – payments are affected with
time drafts subject to acceptance.
e. Local currency – stipulation directs that the
drafts be paid in the currency of the seller.
f. Foreign currency – payment should be made
in foreign currency.
g. Assignable – exporter may not necessarily be
the manufacturer but may request to transfer by
assignment to a third party.
h. Back-to-Back – original letter contains no
provision for assignment.
i. Red-clause – importer has complete
confidence in the exporter to withdraw funds to
purchase the goods.
j. Revolving – order to effect control in the use
of credit.
k. Traveler’s letter of credit – use to provide
travelers with funds enroute.
Orders to Pay
1. Checks – an order of a depositor to his bank
to pay a sum certain in money to a third person
or himself on demand.
a. Personal checks – a business check, has the
same definition as the general check, most
widely used by both private individuals and
businessmen. It is distinct in that its drawer is an
individual.
b. Cashier’s/manager’s/treasurer’s check – also
an order to pay; when the cashier of a bank, in
his official capacity, draws the order against the
bank’s fund (cashier’s check); when the drawer
is a company manager and the funds belong to
the company (manager’s check); when the
drawer is the treasurer of an organization and
the funds against which it is drawn owned by
any one of these organizations (treasurer’s
check).
c. Certified checks – a personal check; bank
certification is required by the recipient of the
check to enhance its acceptability in case of
doubt. The check is then brought to the bank
and the bank representative stamps the word
“Certified” followed by his signature and the date
of certification across the face of the check.
d. Traveler’s check – variation of the traveler’s
letter of credit.
e. Crossed checks – meant for deposit or for a
specified purpose only.
f. Post-dated checks – dated beyond the date of
the deposit or actual issuance.
g. Stale checks – check was to be deposited or
presented for payment six months after.
h. Rubber or bouncing checks – those returned
to the drawer because they are not sufficiently
covered with funds.
i. Cancelled checks – the depositor’s check is
finally cleared and paid by the bank.
2. Drafts – orders to pay and likewise drawn
against a drawee to pay a third person a sum
certain in money on demand or future
determinable time.
a. Money order – order is drawn by a bank on
another bank or its branch to pay a specified
payee (bank money order); order is from one
post office to another (postal money order).
b. Bank draft – order of a bank to another bank,
or that of the depositor to his bank, to pay a third
person a definite sum of money.
c. Trade or commercial draft – order to pay used
by merchants.
d. Sight or demand draft – payable on sight upon
presentation to the drawer.
e. Time draft – order to pay sets a definite future
time for payment.
3. Acceptance – an order to pay; a time draft.
a. Trade acceptance – an order of the seller to
the purchaser to pay a certain sum of money at
a stipulated future time.
b. Banker’s acceptance – when the bank
accepts an order that is presented to it, and
accepts the terms thereon. The bank
representative stamps the word “Accepted” on
the face of the instrument, signs and dates it.
 INVESTMENT CREDIT INSTRUMENTS
In the realm of investment credit, the
instruments used are promises to pay, which are
in the form of bonds, long-term notes, and
evidences of ownership in a corporation.
Bonds – long-term promissory notes issued
under a corporate seal, usually in large sums
and in a series.
2. in the supply of the commodity
3. in the demand for money
4. in the supply of money
The first two changes the alter of the
value of the commodity, and the last two
changes directly affect the value of money and
subsequent price levels.

Long-term promissory notes – only distinction Influence of Credit

is the length of payment. Any circumstances tending to increase
Stock certificate – instrument evidences part the use of credit of limited acceptability such as
ownership of a corporation’s capital through checks, bills of exchange, and promissory
purchase of a share or shares of stocks. notes, lower the value of money and raise the
level of prices.
Stock right – pre-emptive right attached to
ownership of a share of stock. The original
stockholder is given to purchase additional
shares of stocks at the new issue price before
such stocks are offered to the public.
RELATION OF MONEY AND CREDIT TO
PRICES
The purchasing power of money varies
inversely with the level of prices.
Price Index – measures the behavior of prices
of an aggregate group of products or a “market
basket”. An indicator is capable of measuring
changes in cost of living, consumer prices,
construction materials, labor wage rates, and
other economic factors.
Types of Index Numbers
1. Simple arithmetical average – constructed
by simply taking the average of total
percentages in the base year and the year in
comparison.
2. Weighted arithmetical average – individual
commodities are assigned relative weights and
the change in price relatives show the
importance of one commodity over another.
Prices and Money Supply
The price of any particular good is
influenced by alterations either in its own
intrinsic value or in the value of money. Such
changes may be brought about by
corresponding shifts:
1. in the demand for the commodity