Lecture 5: Credit Instruments

Credit Instrument

A document evidencing the existence of an obligation which defines the responsibility of the debtor towards his creditor and the right of the creditor to collect from the debtor on the date assigned.

Credit Instruments with General Acceptability

A widely accepted practice without questioning the integrity of the person offering it, like credit money.

Credit Instruments with Limited Acceptability

Accepted only by few people and may be subdivided intro two types: credit instrument for investment purposes and commercial purposes.

Stock certificates

Evidence of ownership in a corporation

Bond Certificates

Evidence of indebtedness of a corporation to bondholders

Common Stocks

This represent simple ownership of the corporation, have fundamental and voting rights, and entitled to residual claim on the business

Preferred Stocks

Having special privileges and carry certain limitations or restrictions.

Debenture bonds

Unsecured bonds issued against the general credit standing of the issuer

Collateral Trust Bonds

Secured by a pledge of corporate stocks and bonds, and evidence of indebtedness of other corporations which the issuing corporation owns

Mortgage Bonds

Bonded indebtedness secured by a mortgage or real properties of the corporation

Sinking Fund Bonds

Bonded indebtedness requiring the compulsory maintenance of a sinking fund to redeem the bonds at maturity

Registered bonds

Issued in the name of a particular person or entity

Guaranteed Bonds

Bonds whose principal and interest payments are guaranteed by a company other than the issuing corporation

Convertible Bonds

Bonds whose principal and interest payments are guaranteed by a company other than the issuing corporation

Redeemable Bonds

Bonds subject to call, redemption, or purchase before they are due.

Serial Bonds

Bonded whose principal and interest payments are guaranteed by a company other than the issuing corporation

Income bonds

Interest payments of income bonds are dependent on the happening of an event or after the lapse of a certain period

Coupon Bonds

Bonds with detachable coupon which evidence the interest obligations payable at specified period.

Bonds

It serves as proof that its issuer (either the government or a private corporation) has borrowed money from you and will pay you what you’re owed plus periodic interest payments over the period indicated on your bonds’ terms.

Creditors or debtholders

Individuals, organizations, and foreign governments can buy these bonds in exchange for the money what the government needs,

Government bonds

Placed up for auction with institutions that have the capacity to distribute it further to the retail investors, or sold directly to the general public.

Corporation bonds

Issued by private corporations listed on the stock exchange, and they may issue bonds to investors to expand their business or sustain their operations.

Relatively less risk

A relatively safer option because it is much less volatile compared to other forms of investments that can fluctuate depending on the market trends.

Portfolio Diversification

The low-risk features of bonds can offset potential losses that high-risk investments may incur.

Fixed Income

Depending on the type of bonds you buy, interest can be paid periodically, giving you fixed passive income on top of your other sources of income or revenue.

Better interest income

Other low-risk, interest-based options like savings accounts and time deposits offer lower interest rates, while bonds offer much higher interest rates compared to the other two.

Money Market Bills

Negotiable financial instruments bought and sold in the market.

Interbank call loans

These are loans which should be paid upon demand or call by the lending institution.

Promissory Notes (Dealer Papers)

Short-term indebtedness issued by institutions as direct obligor

Repurchase Agreement

Papers sold by dealers to buyers at an agreed price

Certificate of Assignments

Debt instruments that evidence lawful ownership of the holder to the extent of the Peso value indicated on the face of the instruments or a batch of an original lump sum of promissory notes

Certificate of Participation

Evidences lawful ownership of the holder to the extent of the Peso value indicated on the face of the instruments or a batch of an original lump sum of obligation subsequently broken down and denominated into a different Peso value

Commercial Papers

Unsecured promissory notes issued by corporations that use the proceeds to finance short-term working capital need

Central Bank Certificate of Indebtedness

Tax free and earn reasonable rate of interest

Treasury Bills

Bearer notes/debt instruments sold every week at a discount by the Central Bank through competitive auction

DBP Progress Bonds

Issued by the Development Bank of the Philippines and secured by their assets, and these are tax free and convertible into preferred stocks of the selected private corporations

Money Market

-A meeting place for users and suppliers of the short-term funds.

-Traded or consummated upon agreement on the price (includes the rate of interest rate charge for its use)

Dealer

Intermediary in the exchange process actually becomes a party to a money market transaction

Broker

Only acts as an agent for his client who either buyers or sellers

Underwriter

Dealer who handles new line securities.

Transactions in the primary market

Involve the issuance of new securities

Transactions in the secondary market

Confined to already issued and outstanding securities

Promissory notes

Written promise of one person to pay another sum certain of money on demand or at a determinable future time.

Negotiable Promissory note

A transferable promissory note

Non-negotiable promissory note

A non-transferable promissory note

Secured promissory notes

Guaranteed with properties of value

Unsecured promissory notes

Greatly depend upon the character of the however.

Financial Institution Deposits

Promises of certain institutions to return money deposited with them.

Letter of credit

A letter made by the bank to another bank, whether domestic or foreign, requesting the bank to honor drafts drawn against it in behalf of a third party under specific terms and conditions as specified in the letter

Open book accounts

A mere entry made in the ledger of the creditor to show the existence of a credit transactions

Drawer

The one who initiates the payment by using or issuing the check, and the one who holds or owns the bank account

Drawee

The bank or the financial institution

Payee

The one receives or appears the name in the check or credit instrument to whom it was issued.

Checks

Most commonly bills of used exchange for satisfying credit obligations

Crossed Check

A check bearing two parallel lines located at the upper left-hand corner indicated that the check cannot be presented to thebank for encashment

Post Dated Check

A check that shows future date, and this can be paid deposited on the date it bears

Stale Check

A check which is not encashed within a reasonable time.

Manager’s Check, Cashier’s Check and Treasurer’s

Check-

A check drawn against the funds of the bank and drawn by the bank official.

Bouncing Check

Check issued without sufficient funds or drawn against uncollected deposits.

Counter Check

Used by the depositor who has forgotten his check or by the depositor who would like to close his account but whose booklet of checks has been exhausted

Certified Check

A depositor’s own check which the bank certifies

Falsified Check and Forged Check

A falsified check which has been deliberately imitated to deceive the payee or the bank, while a forged check is one with an imitated signature

Personal Check and Business Check

A personal check is used for defraying individual or personal expenses while business check is used for defraying business establishments

Draft

A bill of exchange which is an unconditional order made by the drawer requesting the drawee to pay the payee a sum certain in money on demand or at a determinable future time.

Demand and time drafts

Subject to payment upon presentation or demand to the payee, or his order or bearer. Sometimes called a slight draft.

Bank draft and the commercial or Trade Draft

In a bank draft, the party ordered to pay is a bank, while in trade draft or commercial draft, the party ordered to pay is businessman or business enterprise. Trade or commercial drafts finance commerce while bank drafts are often purchased for investments because of their excellent rating.

Acceptance Draft

A time draft which necessitates the acceptance of the drawee.

Document Drafts

Drafts that necessitate documents to accompany the draft when presented for payment.

Bank Money Order

Order of the bank to another bank to pay a person named therein a sum certain in money on demand

Postal Money Order

Order of a post office to another post office to pay a person named therein a sum certain in money on demand.