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Question

Difficulty: MediumForms and Instruments of Credit

A merchant issues a written instrument explicitly promising to pay a named supplier a specified sum of money on a fixed future date, without involving a third-party drawee to accept the document. Which credit instrument has the merchant executed?

  1. Promissory noteAnswer
  2. B
    Bill of exchange
  3. C
    Letter of credit
  4. D
    Credit note

Answer

Promissory note
A promissory note is an unconditional written promise made by the debtor (maker) to pay a specified sum to the creditor (payee) on demand or at a fixed future date, without involving an intermediary drawee.

Step-by-Step Solution

1
Analyze the nature of the financial instrument described in the scenario.
The instrument is a written promise to pay issued directly by the debtor to a supplier without requiring a third-party drawee.
Credit instruments are fundamentally distinguished by whether they represent an order to pay or a promise to pay.
2
Identify the credit instrument that fits a two-party unconditional promise to pay.
A promissory note fits this definition precisely, involving the maker (debtor) who promises payment to the payee (creditor).
Unlike bills of exchange which involve three parties (drawer, drawee, payee), a promissory note involves only two primary parties.

Key Concept

Promissory Note vs Bill of Exchange
Estimated Time:1m 0s
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Topics

Forms and Instruments of Credit

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