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GEC 104 Week 13 - Promissory Note

A promissory note is a formal written document containing an unconditional promise to repay a sum of money that was borrowed, along with interest, by a specified date. It identifies the maker who borrows the money, the payee who lends it, the principal amount borrowed, any interest rate, and the maturity date when payment is due. Promissory notes can be interest-bearing or non-interest bearing. The maker is legally obligated to repay the principal plus any interest to the payee by the maturity date. A co-maker also signs the note and shares responsibility for repayment if the maker defaults.

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66 views3 pages

GEC 104 Week 13 - Promissory Note

A promissory note is a formal written document containing an unconditional promise to repay a sum of money that was borrowed, along with interest, by a specified date. It identifies the maker who borrows the money, the payee who lends it, the principal amount borrowed, any interest rate, and the maturity date when payment is due. Promissory notes can be interest-bearing or non-interest bearing. The maker is legally obligated to repay the principal plus any interest to the payee by the maturity date. A co-maker also signs the note and shares responsibility for repayment if the maker defaults.

Uploaded by

Reygie Fabriga
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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GEC 104 Mathematics in the Modern World

Unit III The Mathematics of Finance


Lesson 6 Promissory Notes

At the end of this lesson, you should be able to:


a. Identify the types of promissory notes;

PROMISSORY NOTES
A promissory note, sometimes simply referred to as a note, is a commitment to pay back on
a future date a sum of money that was borrowed. The person, company, or institution that has
borrowed the money, and is bound by the note to pay the money back is called the maker; while the
person, company, or institution that lent the money is called the payee. Once a note is executed, and
money is lent to the maker, the payee receives the note, and from then on owns it until it is redeemed
by the maker.

Simple Interest Notes


One type of promissory note is the simple interest note which bears the following
information aside from the maker and the payee:
a. the origin date, which is the calendar date on which the maker receives the money lent
by the payee;
b. the term of the note, stated oftentimes as a definite number of days or months, which
is the time between the origin date and the maturity date;
c. the face value, which corresponds to principal, and is the amount of money lent, and
given by the payee to the maker on the origin date; and
d. the simple interest rate, which is charged by the payee.

A promissory note is a formal written document which contains an unconditional promise to


pay a sum certain in money at a determinable future time, made by a maker to a payee. It is a
negotiable instrument that may either be interest bearing or non-interest bearing.

Parties in a Promissory Note


a. Maker
– the party who made the promissory note and eventually signs on it.
– the party who makes or issues a promise to pay the agreed amount at a
specified future date.
– the debtor in the transaction.
– from the point of view of the maker, the promissory note is a LIABILITY
(NOTES PAYABLE)
b. Co-maker
– a participant in an agreement who also signs the promissory note.
– may or may not be require in any transaction.
– required to meet the financial obligation when the maker cannot pay it.
c. Payee
– the person or business to whom the promise of future payment was made.
– the party who receives the promissory note.
– the creditor in the transaction.
– from the point of view of the payee, the promissory note is an ASSET (NOTES
RECEIVABLE)

Elements of a Promissory Note


a. Principal – the amount of money owed or borrowed by the maker.
b. Interest Rate – percentage rate that is multiplied to the principal and the term of the
note to arrive at the interest for the period.
c. Interest Period or Term of the Note – the period of time during which interest is to be
computed (from date of issuance to maturity date of promissory note).
d. Interest – represents an opportunity cost. An income of the payee and an expense of
the maker.
e. Maturity Date – the date on which final payment of the promissory note is due.
f. Maturity Value
– the amount that the payee expects to receive and the amount that the maker
expects to pay on maturity date.
– maturity value is the sum of the PRINCIPAL and INTEREST (if promissory note
is interest-bearing).

Common Transactions Involving Promissory Notes


a. Promissory note received for services rendered.
 Notes Receivable
 Service Income
 Received note for services rendered

b. Promissory note received for money lent.


 Notes Receivable
 Cash
 Received note for money lent

c. Promissory note received to extend a customer’s account.


 Notes Receivable
 Accounts Receivable
 Received note to extend payment of customer’s account

d. Collection of non-interest bearing note on maturity date.


 Cash
 Notes Receivable
 Collected promissory note on maturity date.

e. Collection of an interest bearing note on maturity date.


 Cash
 Notes Receivable
 Interest Income
 Collected promissory note on maturity date
Type of Promissory Notes

Interest Bearing Note Non-Interest Bearing Note

The rate of interest is stated on the note and


The rate of interest is not stated on the note.
is usually simple interest rate.

The main features of a note usually include the:


 Face Value / Principal amount – the amount stated on the note
 Interest rate if any
 The date – the date on which the note is mad
 Terms or repayment – the length of time until the note is due for payment
 Maturity date – the date on which the maturity value is due
 Payee – the person to whom the payment is to be made
 Maker – the person that signs the note

Promissory Notes: Example of an Interest Bearing Note

The main features of a note usually include the:


 Face Value / Principal amount – the amount stated on the note
 Interest rate if any
 The date – the date on which the note is mad
 Terms or repayment – the length of time until the note is due for payment
 Maturity date – the date on which the maturity value is due
 Payee – the person to whom the payment is to be made
 Maker – the person that signs the note

NAME: ___________________________ COURSE/YEAR/BLOC.: ___________

ESSAY (10 points each)


Answer the following questions precisely and accurately.

1. Cite three reasons why a promissory note is essential in any monetary transaction.

2. Discuss the roles of a co-maker in any financial agreement. Mention the advantages and
disadvantages of being a co-maker.

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