bank 301
9: Woodside Petroleum Limited is about to raise additional short-term funding to meet its funding needs over the next three-month planning period. It is considering issuing commercial bills or promissory notes.
(a) What is a promissory note? Identify and briefly explain the roles of the parties to a P-note issue.
(b) What are the main differences between P-notes and commercial bills of exchange?
A promissory note, which typically has a maturity of 90 days, is described as ‘an unconditional promise in writing made by one person to another, signed by the maker engaging to pay, on demand at a fixed or determinable future time, a sum certain in money to the order of a specified person or to the bearer’ (Viney & Phillips 2012, 308).
The structure of the promissory note is that of a discount security, sold by the issuer for less than the face value in exchange for the face value at maturity (Viney & Phillips 2012, 308). The discount amount, which is the difference between the face value and the issue price, is the cost of borrowing to the issuer and the gain for the buyer of the P note.
The roles of the parties to a P-note issue are dealers and lead managers. Most P-note issue is done by major commercial banks, investment banks and merchant banks. The lead manager would arrange for a dealer panel of market participants. The roles of the dealers are to distribute the notes in the market and to have good success with investors and to also oversee a secondary market for the notes (Viney & Phillips 2012, 309).
The P-notes are similar to the commercial bills of exchange with some differences. The P-note is a promise to pay while the bill is an order to pay. While the P-notes do not require the sellers to endorse the note, the commercial bills of exchange require the endorsement of the sellers. The P-notes enjoy the option of selling the notes in the money market without paying a future debt. However, as the P-notes do not require seller endorsement and are a form
(a) What is a promissory note? Identify and briefly explain the roles of the parties to a P-note issue.
(b) What are the main differences between P-notes and commercial bills of exchange?
A promissory note, which typically has a maturity of 90 days, is described as ‘an unconditional promise in writing made by one person to another, signed by the maker engaging to pay, on demand at a fixed or determinable future time, a sum certain in money to the order of a specified person or to the bearer’ (Viney & Phillips 2012, 308).
The structure of the promissory note is that of a discount security, sold by the issuer for less than the face value in exchange for the face value at maturity (Viney & Phillips 2012, 308). The discount amount, which is the difference between the face value and the issue price, is the cost of borrowing to the issuer and the gain for the buyer of the P note.
The roles of the parties to a P-note issue are dealers and lead managers. Most P-note issue is done by major commercial banks, investment banks and merchant banks. The lead manager would arrange for a dealer panel of market participants. The roles of the dealers are to distribute the notes in the market and to have good success with investors and to also oversee a secondary market for the notes (Viney & Phillips 2012, 309).
The P-notes are similar to the commercial bills of exchange with some differences. The P-note is a promise to pay while the bill is an order to pay. While the P-notes do not require the sellers to endorse the note, the commercial bills of exchange require the endorsement of the sellers. The P-notes enjoy the option of selling the notes in the money market without paying a future debt. However, as the P-notes do not require seller endorsement and are a form
References: (Borgia etl, 2010) (Daniel, 2010) (Flantsbaum, 2009) (HOME FINANCE ADVERTISING FEATURE, 2008) (Home Loan Calculator, 2012)