Promissory Notes for Money Markets

Money markets are defined as wholesale cash markets where corporate bodies, banks, and governing agencies can fund short-term deficits and invest short-term surpluses.  Participants of such markets can lend and borrow for periods of time normally not exceeding thirteen months. While capital markets trade bonds and equity due to their long-term funding nature, money markets trade with paper, which is a short-term financial instrument.  Banks use repurchase agreements and commercial paper, among other instruments, to borrow and trade with one-another in money markets.  In the United States, all governments use issue paper to meet their funding needs.  While the US treasury uses treasury bills to fund the US public debt, states and local governments instead use municipal paper.

Money Market and Promissory Notes
Used extensively in monkey markets, commercial papers are debt instruments issued by companies to meet short-term financing needs.  A commercial paper is an unsecured promissory note with fixed maturity of 1 to 270 days.  A promissory note is defined as a written promise to repay debt under certain terms at a stated time through either a specified series of payments or upon demand.  Promissory notes identify all parties involved, the amount of the debt, a recitation of the consideration for the obligation, the terms of the actual payment, and the interest rate, should one apply.  These notes make unconditional promises to pay a sum of money, yet they differ from IOU’s as they contain specific promises to pay rather than simply acknowledging debt.  Promissory notes may also include acceleration clauses that, should a payment be missed, will make the entire amount due.

Promissory notes may also include provisions regarding the borrower’s rights in case of a default.  In the United States, promissory notes must meet certain conditions that they are negotiable instruments, which include checks and bank notes.  While promissory notes are often used to provide capital to businesses, negotiable promissory notes are used in financing real estate transactions.  Demand promissory notes do not carry a specific maturity date; instead, they are due when the lender makes a formal demand.  In these cases, the lender will only give the borrower a few days notice about the payment’s due date.  Writing and signing promissory notes are often key for tax and record keeping in cases of loans between individuals.

As mentioned briefly above, commercial papers are unsecured promissory notes, which means that if the borrower declares bankruptcy, the secured creditors will be paid before the owner of the debt that is secured by the note.  If one lends money through an unsecured promissory note, then it is wise not to lend any more money than one is prepared to lose, because in the event of a bankruptcy, it is feasible that the lender will in fact not be compensated for his debt.  In the alternative, if a loan is large, the lender should acquire some form of security for the loan such as a lien against the real estate or recognition of the loan on the titled property.  This protects the lender.