Promissory note

Definition

A promissory note is a financial instrument in which one party promises in writing to pay a determinate sum of money to the other party, either at a fixed or determinable future time or on demand of the payee. It is essentially a formalized IOU that includes terms like principal amount, interest rate, and maturity date.

5 Must Know Facts For Your Next Test

1. Promissory notes are often used in business transactions where one party requires financing.
2. They can be either secured or unsecured, affecting the risk level for the lender.
3. Interest rates on promissory notes can be fixed or variable and are influenced by market conditions.
4. The maturity date on a promissory note specifies when the principal and any accrued interest must be paid in full.
5. Failure to meet the obligations of a promissory note can result in legal action and damage to credit ratings.

Review Questions

Related terms

Bond: A debt security under which the issuer owes the holders a debt and is obliged to pay interest and repay the principal at a later date.

Debenture: An unsecured loan certificate issued by a company with an obligation to pay back with interest.

Maturity Date:

The specific date on which the principal amount of a financial instrument must be repaid.