Promissory Note

AAA

DEFINITION of 'Promissory Note'

A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on demand or at a specified future date. A promissory note typically contains all the terms pertaining to the indebtedness by the issuer or maker to the note's payee, such as the amount, interest rate, maturity date, date and place of issuance, and issuer's signature. The 1930 international convention that governs promissory notes and bills of exchange also stipulates that the term “promissory note” should be inserted in the body of the instrument and should contain an unconditional promise to pay.

VIDEO

Loading the player...

BREAKING DOWN 'Promissory Note'

Promissory notes lie somewhere between the informality of an IOU and the rigidity of a loan contract in terms of their legal enforceability. An IOU merely acknowledges that a debt exists, but does not include a specific promise to pay, as is the case with a promissory note. A loan contract, on the other hand, usually states the lender’s right to recourse – such as foreclosure – in the event of default by the borrower; such provisions are generally absent in a promissory note.

Promissory notes that are unconditional and saleable become negotiable instruments that are extensively used in business transactions in numerous countries.

A promissory note is usually held by the payee. Once the debt has been discharged, it must be canceled by the payee and returned to the issuer.

RELATED TERMS
  1. Floating-Rate Note - FRN

    A note with a variable interest rate. The interest rate is usually ...
  2. Drawee

    A legal and banking term used to describe the party that has ...
  3. Blank Endorsement

    A signature by the creator of an instrument, such as a check, ...
  4. Advance Commitment

    A promise or agreement to take some future action. For example, ...
  5. Bill Of Exchange

    A non-interest-bearing written order used primarily in international ...
  6. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. ...
Related Articles
  1. Economics

    What is a Promissory Note?

    A written promise by one party to pay another party a definite sum of money either on demand or at a specified future date.
  2. Credit & Loans

    An Introduction To Perkins Loans

    Check out the eligibility and repayment options, and how you can get this loan forgiven.
  3. Retirement

    Should You Borrow From Your Retirement Plan?

    It makes sense to dip into your savings in some cases, but you must be aware of the potential consequences.
  4. Credit & Loans

    An Introduction To Student Loans And The FAFSA

    Learn how to fill out the FAFSA form so that it is easier for you to fund your education.
  5. Personal Finance

    The Birth Of Stock Exchanges

    Learn how British coffeehouses helped give rise to the juggernaut that is the NYSE.
  6. Credit & Loans

    Can't Get A Bank Loan? Turn To Your Neighbor

    Peer-to-peer lending can be an inexpensive way to gain access to credit when banks are restricting lending -- but you need to understand the entire deal first before jumping in.
  7. Credit & Loans

    An Introduction To Stafford Loans

    Stafford loans provide student funding that a majority of people can easily access. Find out if you qualify.
  8. Personal Finance

    Promissory Notes: Not Your Average IOU

    These may be a handy way to borrow money, but this convenience does not come without risk.
  9. Credit & Loans

    Student Borrowing: University Payment Plans Vs. Federal Student Loans

    University payment plans are a great option for reducing student loan borrowing, but only if you know the details.
  10. Credit & Loans

    How Credit Cards Built A Plastic Empire

    A decade before Mastercard or Visa existed, the first credit card company was introduced.
RELATED FAQS
  1. How can I look up average banker's acceptance yields?

    Average banker's acceptance yields are published regularly in the Wall Street Journal and updated continuously on WSJ.com. ... Read Full Answer >>
  2. What is the difference between a bill of exchange and a promissory note?

    A bill of exchange is a written agreement between two parties – the buyer and the seller – used primarily in international ... Read Full Answer >>
  3. Where on the Internet can I find free sample templates for a bill of exchange?

    A number of different websites offer free templates to help an individual or business generate a bill of exchange. A bill ... Read Full Answer >>
  4. Can I take my 401(k) to buy a house?

    Once you reach 59.5, you can use the funds in your 401(k) retirement savings account to buy a house or any other expense ... Read Full Answer >>
  5. Can I use my 401(k) as a collateral for a loan?

    Although federal Internal Revenue Service, or IRS, regulations prohibit using a 401(k) account as collateral for a loan, ... Read Full Answer >>
  6. Why do commercial banks borrow from the Federal Reserve?

    Commercial banks borrow from the Federal Reserve primarily to meet reserve requirements when their cash on hand is low before ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  2. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  3. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  4. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  5. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  6. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!