Fixed Income Tutorials
- Fixed Income
- Bond Pricing
- Yield Curve
- Convexity of a Bond
- Debt Covenants
- Negative Covenants (Restrictive)
- Credit Analysis
- Credit Analyst Career
- Credit Analyst Interview Questions and Answers
- Credit Rating Process
- Asset Backed Securities
- ABS and MBS Index
- Loss Given Default â€“ LGD
- Secured Loans
- Unsecured Loans
- Secured vs Unsecured Loan
- Subordinated Debt
- Subordination Debt
- Payment in Kind Bond
- Promissory Notes
- Sinking Fund
- Junior Tranche
- Fallen Angel
- Bills of Exchange vs Promissory Note
- Bonds vs Debentures
- Bills of Exchange
- Bond Equivalent Yield Formula
- Equity Research vs Credit Research
- Books on Bonds Market
- Treasury Management Book
- Fixed Income Books
- Credit Research Books
What are Promissory Notes?
Promissory Notes Definition – Promissory note is a note containing a promise to pay a certain amount to the person who should receive the money.
The promissory note isn’t bound by acceptance. That means when the debtor issues the promissory note, the creditor doesn’t need to accept it. At the same time, if it is dishonored, there would be no notice issued for the “maker” of the note since the “maker” only promises to pay the amount within a specified period of time.
Let’s look at promissory note example and how it works.
Promissory Notes Example
Let’s say that Mr. T wants to buy a new garage for his cars. He has two cars, but doesn’t have a place to park them. He approaches a bank for a loan to build a small garage. Bank looks at his financial statements for last few years and sees that they would be able to sanction a note of $100,000 for next 10 years.
In this case, Mr. T needs to write a promissory note and offers the bank with his sign underneath that he would promise to pay the necessary amount within 10 years.
In a promissory note, sometimes, the lender can ask for a security against the loan. It can be a house or any asset. The borrower keeps the asset as a security for the loan he has been taking and then issues a promissory note to pay off the debt within a stipulated time.
In this case, the borrower may lose the asset if he is unable to pay off the money as he promised.
Features of a promissory note
Let’s look at the significant features of a promissory note –
- This note should be documented. A verbal agreement/contract wouldn’t count. The borrower needs to issue a written contract which he promises to abide by.
- The note should mention the amount to be paid to the creditor.
- Along with that the note also needs to mention who will pay the amount and to whom.
- The note should also mention the date within which the borrower promises to pay.
- If the payment would be made in installments, it should be mentioned as well in the note.
- Even the place of commitment should be mentioned in the note.
- One should remember that a promissory note is not an order and there’s no-one to accept it. Rather it’s a promise made by the debtor to the creditor through a written contract.
Parties involved in the promissory note
Even if we have mentioned the parties involved in the note before, we need to understand each of them in detail. Here are they –
- Drawer: In a note, the drawer is the debtor or the borrower. The drawer issues the promissory note and promises to pay a certain amount to the lender within a stipulated period of time. The drawer is also called the maker.
- Drawee: Drawee is another party involved in the note. Drawee is actually the lender or the creditor who would receive the money from the debtor or the borrower. In certain cases, drawee can also ask for a security for the loan (usually an asset). In that case, if the drawer is unable to pay off the said amount within time, the drawee would take claim of the asset. Drawee is also called the payee.
This has been a guide to Promissory Notes, definition along with practical examples. Here we also discuss parties involved and features of Promissory Notes. You may also have a look at these articles below to learn more about fixed income –