CLD - Module 2 Promissory Notes

Question 1

Promissory Note

Answer 1

• written promise by one person to pay money to another.
• The person making the promise is called the maker of the note. This would be the borrower.
• The person to whom payment is made is called the payee. This would be the bank.

Question 2

In order for a promissory note to be negotiable it must satisfy certain legal requirements:

Answer 2

• must contain an unconditional promise to pay
• amount owed should be a specifically stated fixed amount of money
• must be payable to order or to bearer for it to be negotiable
• must be payable at a specific time or on demand of the creditor
• The promissory note must be signed by the maker

Question 3

Types of Promissory Notes

Answer 3

1) Demand Note - payable by the borrower whenever the bank makes demand for payment.

2) Term Loan
- repayment period is longer than one year
- the bank extends credit to the borrower for a period of time until payment falls due at a future date
- Once any part of the note is repaid, the amount repaid cannot be reborrowed.

3) Revolving Credit Note
- permitted to borrow all or part of the principal amount, repay it all at once or in part, and reborrow it.
-

4) Non-revolving multiple advance note
- the borrower is permitted to borrow all or part of the principal amount all at once or in installments. - The amount drawn and repaid cannot be drawn upon or borrowed again

Question 4

Advantages of Prime Rate

Answer 4

• setting the prime rate is done by merely announcing it
• gives the bank the
  flexibility it needs to change the rate of interest charged on its portfolio of outstanding prime rate loans

Question 5

Advantages of LIBOR

Answer 5

• the London market is the most
  commonly used because it is the principal market for interbank placements of U.S. dollar deposits.
• easier to obtain

Question 6

The prime rate is a floating rate of interest established periodically by the bank. T or F

Answer 6

True

Question 7

What are the three factors that are considered when establishing LIBOR?

Answer 7

• by reference to the London market
• the reserve requirements of the bank.
• the increase in the rate to reflect the bank’s anticipated profit on the loan and the creditworthiness of the borrower.