EXAMPLES OF CREDIT

INSTRUMENTS

MARTINEZ, JESSICA ANNE

MORTEL, BIANCA
OCLARES, ROBIN JOHN C.
PASCUAL, FRANCIS
QUIBLAT, IVAN ALEXANDER

WHAT IS CREDIT
INSTRUMENT?
A credit instrument refers to a promise, or order, to
pay a definite or determinable sum of money to bearer,
or to a specified person or his order.
Simply Defined as:
A document which gives evidence of a credit
obligations resulting for a past transaction which sets
forth the responsibility of the debtor to his creditor.

CLASSIFICATION OF CREDIT INSTRUMENT

WITH GENERAL ACCEPTABILITY

Credit Instruments widely acceptable

without questioning the integrity of the
person offering it.

The only credit instrument that meets the

qualification of general acceptability is
credit money

CREDIT MONEY

Bank Notes / PaperMoney- Issued by the

Bangko Sentral ng Pilipinas

Treasury Certificates - a short-term

obligation of the treasury, usually maturing
in one year, paying interest periodically on
a coupon basis no longer issued publicly

WITH LIMITED ACCEPTABILITY

Credit instruments that are accepted only by

few people and may be subdivided into two
types:
1. Credit instrument for INVESTMENT PURPOSES
a. Stock Certificate
b. Bond Certificate
c. Money Market Bills

2. Credit instrument for COMMERCIAL

PURPOSES
a. Promise To Pay
To Pay
1. Promissory Note
2. Financial Institution Deposits
Drafts/Bill of Exch
3. Letter ofCredit

b. Orders
1. Checks
2.
3. Money

CREDIT MONEY
BANK NOTES

TREASURY CERTIFICATES

BANK NOTES & TREASURY CERTIFICATES

Banknotes of the Philippine peso are issued

by the Bangko Sentral ng Pilipinas for
circulation in the Philippines.

The smallest amount of legal tender in wide

circulation is 20 pesos and the largest is
1000 pesos.

Treasury Certificate - It was a

nonmarketable, public issue with a
short maturity, usually three months
and never more than a one year.
They were issued once or twice every
month with odd interest rates (such as
5.471% and 6.053%) and sold at par.

CREDIT INSTRUMENT FOR INVESTMENT PURPOSES

BONDS

STOCKS

BONDS
It is an instrument of indebtedness of the bond issuer to the holders.
It is a debt security, under which the issuer owes the holders a debt and, depending on the
terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal
at a later date, termed the maturity date.
Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly).
Very often the bond is negotiable, i.e. the ownership of the instrument can be transferred in
the secondary market. This means that once the transfer agents at the bank medallion stamp
the bond, it is highly liquid on the second market.
Bonds are issued by public authorities, credit institutions, companies and supranational
institutions in the primary markets. The most common process for issuing bonds is through
underwriting.

BONDS
DEBENTURES BONDS
are bonds that are not secured by specific property or
collateral. Instead, they are backed by the full faith and
credit of the issuer, and bondholders have a general claim
on assets that are not pledged to other debt.
MORTGAGE BOND
A mortgage bond is collateralized by one or several
mortgaged properties. In case of default, the mortgaged
properties may be sold to pay back bondholders.
GUARANTEED BOND
A debt security that offers a secondary guarantee that
interest and principal payment will be made by a third
party, should the issuer default due to reasons such as
insolvency or bankruptcy. A guaranteed bond can be
municipal or corporate, backed by a bond insurer, a fund or
group entity, or a government authority.
REGISTERED BOND
A bond whose owner is registered with the bond's issuer.
The owner's name and contact information is recorded and
kept on file with the company, allowing it to pay the bond's
coupon payment to the appropriate person. If the bond is in

BONDS
BEARER BOND
It is a debt security issued by a business entity,
such as a corporation, or by a government. It differs
from the more common types of investment
securities in that it is unregistered no records are
kept of the owner, or the transactions involving
ownership. Whoever physically holds the paper on
which the bond is issued owns the instrument. This
is useful for investors who wish to retain anonymity.
Recovery of the value of a bearer bond in the event
of its loss, theft, or destruction is usually impossible.

MUNICIPAL BOND
A debt security issued by a state, municipality or
county to finance its capital expenditures. Municipal
bonds are exempt from federal taxes and from most
state and local taxes, especially if you live in the
state in which the bond is issued.

BONDS

GOVERNMENT BOND

A debt security issued by a government to support

government spending, most often issued in the
country's domestic currency. Government debt is
money owed by any level of government and is
backed by the full faith of the government.

CORPORATE BOND

A debt security issued by a corporation and sold to

investors. The backing for the bond is usually the
payment ability of the company, which is typically
money to be earned from future operations.
Corporate bonds are considered higher risk than
government bonds. As a result, interest rates are
almost always higher, even for top-flight credit
quality companies

STOCK CERTIFICATE

A type of security that signifies ownership in a

corporation and represents a claim on part of
the corporation's assets and earnings.

There are two main types of stock:

1. COMMON STOCK usually entitles the owner

to vote at shareholders' meetings and to receive
dividends.

2. PREFERRED STOCK generally does not have

voting rights, but has a higher claim on assets and
earnings than the common shares

CREDIT INSTRUMENT FOR COMMERCIAL PURPOSES

PROMISE TO PAY

ORDERS TO PAY

OPEN BOOK ACCOUNT

Gives the implied verbal promise of the debtor when he buys consumable goods on credit. The
creditor enters this ledger to show the existence of the credit transaction.

Advantages:
a. It is convenient.
b. It is simple.
c. The absence of legal evidence is an advantage to the debtor for he gives no written evidence
for his debt, and stimulates sales on the part of the creditor.
d. It may lead to prompt payments because debtors may take advantage of cash discounts
granted by the creditors.

Disadvantages:
a. It may lead to disputes and misunderstanding.
b. Payment is dependent on the debtor's voluntary action.
c. Since there is no written evidence the essentials of negotiability are lacking in this type credit
instrument.

BANKBOOK

Apassbookorbankbookisapaperbook
usedtorecordbanktransactionsona

deposit.Dependingonthecountryorthe
financialinstitution,itcanbeofthe
dimensionsofachequebookorapassport.

Apassbookisusedforaccountswithalow
transactionvolume,suchasa savings.A
banktellerorpostmasterwouldwrite,by
hand,thedateandamountofthe
transaction,theupdatedbalance,andenter
hisorherinitials.

BANK BOOK

PROMISSORY NOTE

It is an unconditional written promise of the maker to pay the

bearer or order a certain sum of money of at a future
determinable time.

Advantages:

a.There is a tangible proof of the existence of the debt.

b. There is fixed time for payment.

c. Prompt payment can be expected rather than at the

whim of the debtor.

d. It commands a higher as an asset especially for

seeking, financial assistance.

e. It gives no opportunity to dispute the quality of goods

purchased upon credit.

Disadvantages:

a. The inflexibility of the promissory note and its

convenience of the part of the debtor has limited its use.

b. The debtor has no choice on whether to take advantage

The
interest
rate on
the note

The principal amount

to be paid plus the
interest

The date
the note
was drawn
The
Payee to
by the
maker/debtor
whom the
Maturity
maker
who is to make payment is
date
or
the payment on to be made
due
the note

COLLATERAL PROMISSORY NOTE

In
In similar
similar to
to ordinary
ordinary promissory
promissory note
note but
but a
a collateral
collateral
promissory
promissory note
note is
is described
described on
on its
its face
face or
or on
on a
a separate
separate
document.
document. It
It is
is more
more secure
secure than
than an
an ordinary
ordinary promissory
promissory
note
note in
in that
that there
there is
is some
some property
property held
held on
on deposit
deposit to
to assure
assure
payment
payment of
of the
the debt.
debt.
Characteristics:
Characteristics:
a.
a. It
It contains
contains the
the borrower's
borrower's unconditional
unconditional promise
promise to
to pay
pay the
the
amount
amount of
of the
the loan
loan to
to the
the order
order of
of the
the lender
lender at
at maturity.
maturity.
b.
b. The
The description
description of
of the
the collateral
collateral pledge
pledge is
is written
written on
on its
its face
face
or
or on
on a
a separate
separate document.
document.
c.
c. It
It contains
contains a
a provision
provision that
that the
the holder
holder of
of the
the note
note has
has a
a lien
lien
to
to the
the extent
extent of
of the
the borrower's
borrower's liability
liability on
on all
all securities
securities and
and funds
funds
of the
the latter
latter which
which are
are under
under the
the control
control of
of the
the holder
holder of
of the
the
of
note.
note.
d.
d. It
It may
may provide
provide that
that upon
upon default
default of
of payment
payment of
of the
the note
note
and
and all
all other
other liabilities
liabilities will
will become
become due
due and
and payable
payable without
without
demand or
or notice,
notice, thus
thus giving
giving the
the holder
holder the
the right
right to
to dispose
dispose of
of
demand
the
the collateral.
collateral.
e.
e. The
The holder
holder is
is also
also given
given the
the right
right to
to transfer
transfer the
the note
note and
and
pledge
pledge the
the collateral
collateral without
without the
the notice
notice to
to the
the borrower.
borrower.
f.
f. It
It may
may contain
contain the
the provision,
provision, which
which would
would require
require the
the
borrower
borrower to
to submit
submit the
the additional
additional collateral
collateral in
in case
case the
the value
value of
of
that is
is already
already held
held by
by the
the creditor
creditor declines.
declines.
that

January11,2013
I,JaneDoe,residingat111MapleDr.,LosAngeles,CA90435,herebypromisetopayback,in
full,theborrowedamountof$1800plusinteresttoJohnSmithat5432ApplewoodSt.,Los
Angeles,CA90456.Thismoneywillbeusedforthepurposeofbuyinganewcomputerfor
school.
Thefirstpaymentintheamountof$200plus1.5%interestmustbepaidbyMarch1,2013and
onthesamedateeachmonththereafteruntilthefullamountispaidback,whichmustbeno
laterthanNovember1,2013.
IfImissapaymentoramlateforapayment,0.05%interestwillbeaddedonthealready
agreeduponinterest.
IfIfailtopaybackthetotalborrowedamountbytheagreedupondate,Mr.Smithwillbeentitled
to1%interesteachmonthinadditiontotheinterestalreadyaccrued.IfIamunabletopaythe
interestortheowedamount,Mr.SmithwillbeguaranteedmyHDflatscreenTVandHPTablet
worthatotalof$2,000.
Astheborrower,Iamawareoftherighttobeinformedthatthenotecanbetransferredbythe
lendertoanotherparty.Theoriginaltermsandagreementwillremaineffective,butthedebtwill
bepayabletoadifferentparty,whichwillbeagreeduponatthetimeoftransfer.
Thankyouforyourcooperation.
Signed,

JaneDoe
(818)5559876

LeslieJones
3254MainSt.,LosAngeles,CA98766
(213)5557878

JohnSmith
(818)5554567

Downloadedfromhttp://www.wikihow.com

LETTER OF CREDIT

Letters
Letters of
of credit
credit are
are often
often
used
used in
in international
international
transactions
transactions to
to ensure
ensure
that
payment
that payment will
will be
be
receive
receive

A
A letter
letter from
from a
a bank
bank
guaranteeing
guaranteeing that
that a
a
buyer's
buyer's payment
payment to
to a
a
seller
will
be
received
seller will be received on
on
time
time and
and for
for the
the correct
correct
amount.
amount.

In
In the
the event
event that
that the
the
buyer
buyer is
is unable
unable to
to make
make
payment
payment on
on the
the
purchase,
purchase, the
the bank
bank will
will
be
required
to
be required to cover
cover the
the
full
full or
or remaining
remaining amount
amount
of
of the
the purchase.received.
purchase.received.

CERTIFICATE OF DEPOSIT

Certificate of Deposit, commonly called

a CD. The CD is a written
acknowledgment by a bank that it has
received money and agrees to repay it
at a time specified in the certificate.

The first negotiable CD was issued in

1961 by First National City Bank of New
York (now Citibank); it was designed to
compete for corporate cash that
companies were investing in Treasury
notes and other funds.

Because CDs are negotiable, they can

be traded easily if the holder wants
cash, though their price fluctuates with
the market.

CHECKS

Generally, it is an order of a depositor to his bank to pay a certain amount

of money to a third party of himself on demand.

Advantages of checks

1. A check facilitates payments since exact amounts can be written on it

face. Thus, there is no need of splitting money into different
denominations, large or small. Therefore, it is convenient medium of
exchange.

2. The check serves as a receipt for payment.

3. The check is more portable than even money itself.

4. It is safer to use on certain occasions.

5. Payment can be recalled if necessary. Because of the stop payment

order, one can recall or cancel payment if he is not satisfied the
merchandise or if delivery is delayed.

6. The use of checks affords the owner bank accommodations, such as

facilitating payment of out-of-town checks or perhaps the facility of
getting a loan.

Disadvantages:

Checks owners must necessarily be very careful in issuing or

handling their checks. Failure too do so cause either embarrassment of
their part or loss of money. If one is not careful in keeping the stabs up-todate, he might issue a bouncing check. The signature on the checks can

Different types of Checks:

1. Personal Check - sometimes known as a business check,
and has the same definition as the check in general.
2. Cashier's/Manager's/Treasurer's - is one drawn by the
cashier or treasurer or manager of the bank upon itself in favor
of a third person.
3. Certified check - to enhance its acceptability, as the
owner's credit worthiness may be doubted, the bank's
certification is required by the recipient of the check. The check
is then brought to the bank and the authorized representative,
after checking the depositor's ledger, writes/stamps the word
"CERTIFIED" followed by his signature and date of certification
across the face of the check.
4. Traveler's check - used by the traveler's. Its form is
different in that it comes in convenient sizes and denominations
in dollar.
5. Crossed check - such check has to be deposited to the
account of the payee in his bank. It may easily be recognized
and distinguished by the presence of the two parallel lines
appearing in the upper left hand corner of the check.
6. Post-dated-check - one issued by the drawer showing
future date.

PERSONAL CHECK
1.) Date - the date the check is written
(cannot be a future date) 2.) Maker person/business who writes the check - the
name will be printed on the check 3.) Payee person/business to whom the check is written
4.) Signature line or lines - two or more
signatures can be required on a check 5.)
Written amount - the amount written in
numbers 6.) Legal amount - the amount
written in words 7.) Check number - which
is printed on the check and appears in the
MICR line on the bottom of the check 8.)
Routing number - appears in the MICR line
on the bottom of the check 9.) Account
number - appears in the MICR line on the
bottom of the check

MANAGERS CHECK

A managers check or MC is a check

issued by the bank, payable to a payee
(individual or corporation) as indicated by
the person who buys the MC. It is often
used in situations when the beneficiary
does not accept cash or personal checks.
One of the benefit of receiving or asking for
a managers check is the check is good as
cash. The bank puts a hold on the MC
buyers account or have them pay the
check amount upfront.

CASHIERS CHECK
A check written by a financial
institution on its own funds. It is then
signed by a representative of the
financial institution and made payable
to a third party.
A customers who purchases a cashier's
check pays for the full face value of
the check and usually also pays a
small premium for the service.
These checks are secured by the funds
of the issuer - usually a bank - and
include the name of a payee (the
entity to which the check is payable),
and the name of the remitter (the
entity that paid for the check).

TRAVELERS CHECK

Travelers checks are usually

used by people that on are
vacation in other countries.

They are checks with fixed

values that travelers can use
just as cash in other countries.

The big advantage is that if a

person loses their traveler
checks, they can call the issuing
bank and get new checks to
replace the lost or stolen ones.

CERTIFIED CHECK

A type of check where the issuing

bank guarantees the recipient of
the check that there is enough
cash available in the holder's
account to be transfered when the
check is used and also that the
account holder's signature on the
check is genuine.
Certified checks are typically used
in situations where the recipient is
unsure about the creditworthiness
of the account holder and doesn't
want to the check to bounce.

CROSSED CHECK
1. Name of your banking institution which is also called the
drawee bank or paying bank.
2. Account Payee Only crossing is a directive to the collecting
banking institution to pay into the account of the payee.
3. Payee is the person to whom the cheque is to be made.
Ensure that the name of the person is correctly spelt and
written close to the words Pay To.
4. Date of the cheque. To be able to receive payment, the date
must be the current date. The date must be written in DDMMYY
format, the first two digits for the day, the next two digits for
the month and the last two digits for the year.
5. The person who holds and presents the cheque at the
banking institution. It is advisable to cross out or bearer to
avoid any stolen cheque from being paid out.
6. The payment amount written in words. The same value will
be written in the box beside it.
7. Name of the account holder which is also called the "drawer
name".
8. Your signature as the drawer of the cheque. You should
ensure that your signature does not extend into the amount
box.

9. Cheque ID.
10. Serial number of the cheque. Each cheque has a
different number for identification purposes

11. Bank code*.

12. Branch code*.
13. Your current account number.
14. Transaction code.
15. Amount field.

POST DATED CHECK

Any check or draft that has a

future date written upon it
by the user.

The amount of the check will

not be drawn from the
account until the date
written on the check.

STALE CHECK
STALE CHECK is a check that is
six months or older than the
date affixed to the check by the
maker.
If a customer's check is
presented more than six months
after the date appearing on the
check, the paying bank has the
option of paying or dishonoring
the check because the check is
deemed "stale".

DIS

NO
O
H

ED
R
U

MONEY ORDER
A money order is a payment order for a pre-specified amount of
money. As it is required that the funds be prepaid for the amount
shown on it, it is a more trusted method of payment than a
cheque.
Features and Benefits:
The money order is purchased with cash. Maintains confidentiality
of your account and guarantees payment to the payee.
A legal form of alternative payment. Provides you with a safe
method of paying for goods or services where a personal check is
not acceptable.
You will receive a duplicate copy to maintain record keeping. There
is peace of mind in knowing that you have a record of the purchase
of the money order.
Money orders may be purchased up to a maximum, designated
amount. You can access as much as necessary in your checking
account at your financial institution, or you can use cash to pay for
them.
There are fees for each money order purchased. Fees are nominal
and will usually be attached directly to the transaction.
Money orders can be purchased 24/7 at some places. For
emergencies, money orders can be purchased at some 24 hour
stores.

The
The amount
purchasers paid/purchased
name of the person or address
company
Signature of the
whom you wish to pay
purchaser
immediately

MONEY ORDER

POSTAL MONEY ORDER

an order of a post office to another

post office to pay a person on demand

TIME DRAFT

A type of foreign check that is

guaranteed by the issuing bank,
but that is not payable in full
until a specified amount of time
after it is received and accepted.

Time drafts are a type of shortterm credit used for financing

transactions of goods in
international trade.

They allow the buyer a delay in

payment after accepting a
shipment of exported goods.

SIGHT DRAFT
DRAFT/ BILL OF EXCHANGE

The sight draft is most commonly

used in international trade.

In a sight draft, the payment is on

demand or on presentation of the
negotiation documents to the paying
bank or the importer.

In practice, the bank may pay within

three (3) working days (not instantly)
after the receipt and review of the
negotiation documents and if they
are in order, that is, the documents
comply exactly to the letter of credit
(L/C) stipulations.

DRAWN UNDER LETTER OF CREDIT NO LC304/3610/12IC

ISSUED AT AMSTERDAM, ON 04.FEBRUARY.2013
ISSUED BY COMMERZBANK AG FRANKFURT AM MAIN
EUR 100,000.00.
GERMANY.

AT SIGHT PLEASE PAY AGAINST THIS DRAFT TO THE ORDER OF

OURSELVES THE SUM OF ONE HUNDRED THOUSAND EURO AND
ZERO CENT ONLY.

Drawee: Drawer:

COMMERZBANK AG, EXPORT HANDEL NV

FRANKFURT AM MAIN BRANCH PO BOX 123
AMSTERDAM
GERMANY HOLLAND
(signature / stamp)

SIGHT DRAFT
is the person or entity that a draft is directed to and
that is ordered to pay the amount stated on it

is a person who pays

the recipients of money

one who directs a person or an entity, usually a bank, to

pay a sum of money stated in an instrumentfor example,
a person who makes a draft or writes a check.

BANKERS ACCEPTANCE

A banker's acceptance, or BA, is

a draft or bill of exchange drawn
on and accepted by a bank.
It is an order by the drawer to
the bank to pay a specified sum
on a specified date to a named
person or to the bearer of the
draft.
Once accepted it becomes a
liability of the bank. If the bank
has a secure reputation it is
readily tradable.

TRADE ACCEPTANCE

a time draft or bill of exchange for the amount of a specific

purchase drawn by the seller on the buyer, bearing the buyer's
acceptance, and often noting the place of payment (as a bank)

Benefits of Trade Acceptance:

Provides a liquid asset and makes possible a fuller utilization of

the commercial credit of the country than is possible under
existing methods.

It benefits the buyer because it develops careful buying.

Enables him to keep better track of his out-standing obligations,

thereby avoiding the evils of over-extension.

Strengthens his credit and puts him in the position of a

preferred buyer.

Develops in him the habit of prompt payment and furnishes him

with an excellent reason for requiring prompt payment from his
customers.

Enables him to realize that credit is as tangible as cash and

should be guarded and used accordingly.

Eliminates wastage and lost motion attending the open book

account method.