Promissory Note

Promissory Note: Definition

A promissory note is an instrument in writing (not a banknote or currency note) that contains an unconditional undertaking, signed by the maker, to pay a certain sum of money only to a certain person or entity.

Promissory Note: Explanation

A promissory note is an unconditional promise in writing made by one person to another, stating that they will pay a specific sum of money on demand or after a specific period or at a specific future date.

Specimen/Format of Promissory Note

Promissory Note Specimen

Features of Promissory Note

It must be in writing
It must be signed by the maker
It is a promise to pay
The promise to pay must be unconditional
The amount payable must be certain
The amount must be expressed in terms of money only
Acceptance is not required
It can be endorsed

Difference between Promissory Note and Bill of Exchange

Differences	Promissory Note	Bill of Exchange
1. Maker	A promissory note is made by a debtor. They are required to pay the amount of the instrument.	It is drawn or made by a creditor, who is the only person who can receive the amount of the bill.
2. Parties	There are two parties in a promissory note (i.e., maker and payee).	There are three parties in a bill of exchange (i.e., drawer, drawee, and payee).
3. Promise and Order	An unconditional promise to pay.	An unconditional order to pay.
4. Nature of Liability	Liability of maker is primary.	Liability of drawer is secondary.
5. Acceptance	No need for acceptance to become a complete legal instrument.	Acceptance is necessary to become a complete legal instrument (except for demand bills).
6. Payable to Dishonor	Cannot be drawn payable to the maker.	Can be drawn payable to the maker.
7. Notice of Dishonor	Notice of dishonor of promissory note is not compulsory.	Notice of dishonor of bill of exchange is compulsory.
8. Protest	Protest against dishonor is not necessary.	Protest against dishonor of foreign bill of exchange is considered necessary.

Frequently Asked Questions

What is a promissory note?

A promissory note is an unconditional written promise to pay a specific sum of money to a certain person or entity.

What are the features of a promissory note?

The features of a promissory note include that it must be in writing, it must be signed by the maker, it is a promise to pay, the promise to pay must be unconditional, the amount payable must be certain, and the amount must be expressed in terms of money only.

What is the difference between a promissory note and a Bill Of Exchange?

The key difference between a promissory note and a Bill Of Exchange is that the maker of a promissory note is required to pay the amount of the instrument while, in contrast, the drawer of a Bill Of Exchange is only required to accept the payment. Another key difference is that notice of dishonor for a promissory note isn't compulsory whereas it's compulsory for bills of exchange (particularly foreign ones).

What is the statutory requirement of a promissory note?

A promissory note must be in writing and signed by the maker. There are no technical requirements for a promissory note. The amount payable must be certain or capable of being made certain either by computation or reference to some document which specifies it. A promissory note must be payable on demand or after a certain period.

What are the types of promissory notes (i.E., Unconditional, conditional)?

Unconditional: an unconditional promise in writing made by one person to another that they will pay that amount of money only upon receipt of the instrument at some future date or time. Conditional: a promise to pay which is dependent on the occurrence of a particular event or set of circumstances. For example, a note might be made payable only if the maker's business prospers.

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.