Note

What is a 'Note'

A note is a financial security that generally has a longer term than a bill but a shorter term than a bond. U.S. Treasury notes, for example, are sold in $100 increments, pay interest in six-month intervals and pay investors face value upon maturity. There are numerous types of notes, including mortgage-backed notes, unsecured notes, municipal notes, bank notes, euro notes, promissory notes, demand notes and structured notes.

BREAKING DOWN 'Note'

A note is a debt security obligating repayment of a loan at a set interest rate in a defined time period. The following are three types of notes.

Unsecured Note

An unsecured note is corporate debt without attached collateral, typically lasting three to 10 years. The interest rate, face value, maturity and other terms vary. For example, say Company A plans to buy Company B for $20 million. Since Company A has $2 million in cash, it issues $18 million in unsecured notes. Because no collateral is attached to the notes, if the acquisition does not work out and Company A stops making payments, investors may have little compensation if Company A is liquidated. Since an unsecured note is simply backed by a promise to pay, it has a higher interest rate and is riskier than a secured note or a debenture, which is backed by an insurance policy in case the borrower defaults on the loan.

Promissory Note

A promissory note is written documentation of money loaned or owed from one party to another. The loan’s terms, repayment schedule, interest rate and payment information are included in the note. The borrower, or maker, signs the note and gives it to the lender, or payee, as proof of the repayment agreement. “Pay to the order of” is often used in promissory notes, designating to whom the loan is repaid. The lender may choose to have the payments go to himself or to a third party to whom money is owed. For example, Sarah borrows money from Paul in June and lends money to Scott with a promissory note in July. Sarah designates Scott’s payments go to Paul until Sarah’s loan from Paul is paid in full.

Convertible Note

A convertible note is typically used by an angel investor funding a business without a clear company valuation. An early-stage investor may choose to avoid placing a value on the company to affect the terms under which later investors buy into the business. A convertible note is structured as a loan. The balance automatically converts to equity under terms governed by terms set when a later investor buys equity in the company. For example, an angel investor invests $100,000 in a company using a convertible note. An equity investor invests $1 million for 10% of the company’s shares. The angel investor’s note converts to one-tenth of the equity investor’s claim. The angel investor may receive additional shares to compensate for the extra risk of being an earlier investor.

RELATED TERMS
  1. Secured Note

    A type of loan that is backed by the borrower's assets. If a ...
  2. Unsecured Note

    A loan that is not secured by the issuer's assets. Unsecured ...
  3. Promissory Note

    A financial instrument that contains a written promise by one ...
  4. Capital Note

    Short-term unsecured debt generally issued by a company to pay ...
  5. Construction Loan Note - CLN

    A short-term obligation in the form of a note, used for the funding ...
  6. Unsecured Loan

    A loan that is issued and supported only by the borrower's creditworthiness, ...
Related Articles
  1. Options & Futures

    Principal-Protected Investments: Risks, Fees And Regulations

    Discover if these instruments hit the right note for you.
  2. Credit & Loans

    What is an Unsecured Loan?

    An unsecured loan is based on the creditworthiness of the borrower, and has no collateral securing the loan.
  3. Bonds & Fixed Income

    Structured Notes: Buyer Beware!

    At first glance, this product looks like the answer to investors' prayers. In reality, it's just too good to be true.
  4. Bonds & Fixed Income

    Retail Notes: A Simpler Alternative To Bond Funds

    These securities are meant to be held until maturity, removing the burden of complex pricing that sometimes plagues bonds.
  5. Financial Advisors

    Worried About Stocks? Try on Convertibles

    Convertibles are a good hedge against equity market risk (if you're o.k. with losing a bit of upside potential).
  6. Options & Futures

    When Your Business Needs Money: Angel Investors

    If you have a promising business that needs a boost, you may be able to put your faith in these wealthy investors.
  7. Economics

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  8. Investing

    Why Include Convertible Securities in Your Portfolio

    What are convertible securities and why you should include them in your portfolio.
  9. Options & Futures

    Lending Clubs: Better Than Banks?

    If you need to borrow money and your credit is making it tough, this new option may be just what you're looking for.
  10. Investing

    Advising FAs: Explaining Bonds to a Client

    Most of us have borrowed money at some point in our lives, and just as people need money, so do companies and governments. Companies need funds to expand into new markets, while governments need ...
RELATED FAQS
  1. What is the difference between a bill of exchange and a promissory note?

    Learn what bills of exchange and promissory notes are, along with notation of the primary differences between these two documents. Read Answer >>
  2. What is the difference between secured and unsecured debts?

    Learn the differences between secured and unsecured debt; discover how banks buffer risks associated with each type of loan ... Read Answer >>
  3. Are secured personal loans better than unsecured loans?

    Read about the differences between secured loans and unsecured loans and how they are used. Learn about forms of collateral ... Read Answer >>
  4. What are some examples of debts that I can consolidate?

    Read about different kinds of debts than can be combined into a consolidation loan, including unsecured debts, secured debts ... Read Answer >>
  5. What are typical forms of long-term debt for a public company?

    Learn typical forms of long-term debt for a public company, such as bonds, term loans, paid-in-kind notes, leases and hybrid ... Read Answer >>
  6. What are the differences between delinquency and default?

    Find out more about loan delinquency, loan default, and the difference between a loan borrower defaulting and being delinquent ... Read Answer >>
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center