credit instruments: definition, classes, and kinds

a. Credit Instruments with General Acceptability

A written or verbal agreement that acknowledges the responsibility to
pay money on demand or at any point in the future is referred to as a credit
instrument. Credit instruments can be categorized in a variety of ways,
including according to their form, acceptability, purpose, and negotiability.
Credit instruments that are generally accepted are ones that can be exchanged
from one party to another without raising any concerns about where they
came from or how they can be used. A promisor must issue this kind of credit
instrument to a reliable party. Credit money is the term for these kinds of
instruments, which can take the form of bank notes, treasury bills, or
fiduciary paper money.
b. Credit Instruments with Limited Acceptability
The use of credit instruments has replaced the use of money. Limited
acceptability credit instruments are those whose acceptance is based on the
issuer's or maker's credit status. Promissory notes, bills of trade, and various
kinds of bank credit are some examples of these instruments. Investment and
commercial credit instruments fall under the category of limited acceptability
of credit since acceptance is dependent on a specific range of factors, such as
the issuer's credit standing. Without raising further concerns regarding their
origins and exchangeability, these instruments cannot be transferred from
one another.
i. investment credit instruments
Investment credit instruments are within the category of credit
products with limited acceptance. These are financial instruments that
generate revenue through interest or dividend payments. Bonds and
stocks are both examples of investment credit instruments. While bonds
are loans issued by a firm or the government, stocks are given as a portion
of ownership in a corporation. While most bonds yield fixed income over
time, stocks must increase in value and be sold on the stock market at a
price higher than the purchase price to generate profit.

Lozano, Kaila Mae M. fin 3104-4

credit instruments: definition, classes, and kinds
ii. commercial credit instruments
On the other hand, commercial credit instruments operate as cash
alternatives in commercial transactions. Checks, bills of exchange,
promissory notes, bills of exchange, bank drafts, and bank deposits are
some examples of this. Commercial credit instruments are categorized
into promises to pay and orders to pay and have limited acceptability.
Instruments that contain a written promise from the issuer or maker to
pay the payee a certain amount of money, either immediately or at a
specific future date, are referred to as promises to pay instruments.
Order-to-pay instruments are credit instruments that are drawn against
the money that has been deposited to pay the beneficiary a certain sum of
money on demand.
c. Negotiable Instruments Law: Negotiability; Negotiation; Indorsement
A signed paper that promises to pay a certain amount to a particular
person or the assignee is referred to as a negotiable instrument. The
provisions of the law on negotiable instruments are covered by Act No. 2013,
sometimes referred to as the Negotiable Instruments Law. An instrument is
negotiated, according to the law, when it is given from one person to another
in a way that makes the recipient the holder of the instrument. It included
topics like the building of ambiguous instruments, the purposes and types of
instruments, and many other topics relevant to negotiable instruments. The
Act's objectives include promoting the free flow of credit and simplifying
transaction agreements and contracts involving commercial paper.

Lozano, Kaila Mae M. fin 3104-4