Chapter V

CREDIT INSTRUMENTS AND IT’S NEGOTIATION

CREDIT INSTRUMENT
-a document evidencing the existence of a credit 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
designated.

THREE KINDS OF CREDIT INSTRUMENTS

 Open Book Account

 Promissory Note
 Trade Acceptance

CLASSIFICATION OF CREDIT INSTRUMENTS

 Credit Instruments with General Acceptability

-instruments that are widely acceptable without questioning the integrity of the person offering
it. Credit money is any future monetary claim against an individual that can be used to buy goods
and services.
 Credit Instruments with Limited Acceptability
- those credit instruments that are accepted only by few people
>Credit Instruments for Investment Purposes
subdivided into: stock certificates, bond certificates and money market bills.

Stock Certificates

-legal document that certifies ownership of a specific number of shares or stock in a corporation.

Bond Certificates

-evidences of indebtedness of a corporation to bondholders.

Money Market Bills

- negotiable financial instruments bought and sold in the market.

Money market -meeting place for users and suppliers of short-term funds.

Parties of a money market transaction

a. Fund User-companies with high credit rating.

b. Fund Supplier- individuals or corporations with excess liquidity.

c. Brokers- individuals or institutions engaged in the buying and selling of money market instruments.
KINDS OF BONDS

A. Debenture Bonds – a bond issued with no collateral. Instead, investors rely upon the general
creditworthiness and reputation of the issuing entity to obtain a return of their investment plus interest
income.
Examples: Treasury Bonds and Treasury Bills
B. Collateral Trust Bonds –A bond that is secured by a financial asset such as stock or other bonds that is
deposited and held by a trustee for the holders of the bond.

C. Mortgage Bonds – These bonds are typically backed by real estate holdings and/or real property such
as equipment.

D. Sinking Funds Bonds – a restricted asset of a corporation that was required to set aside money for
redeeming or buying back some of its bonds payable on maturity.
E. Registered Bonds – bond issue where the bond owner's name is on record with the bond issuer.