FIN 012: CREDIT AND COLLECTION

STUDENT ACTIVITY SHEET #4

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

Lesson title:Major Documents used in Credit transactions and Materials:

Credit Instruments SAS
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Lesson Objectives: References:
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1. Explain the credit instrument, its functions and identify its common 16/01/18/credit-instruments/#
types. https://prezi.com/eiglu-mww6tp/cop
2. Assess the advantages and disadvantages of credit instruments y-of-major-documents-used-in-cred
it-transactions/

Productivity Tip:
Always remember, you need to be strong so that you can be strong for others.

A. LESSON PREVIEW/REVIEW
Introduction (2 mins)
Hello! Welcome to another session for credit and collection, I hope you are all doing well. Let’s have a
recap on what we had discussed in your last module.

Let us identify and common forms of credit;

(a) Revolving credit this form of credit allows you to borrow money up to a certain amount.

(b)Installment credit which involves a set amount borrowed, a set monthly payment and a set timeframe of
repayment

(c)Non-Installment or Service Credit, this form of credit allows the borrower to pay for a service, membership,
etc. at a later date. Examples are your cell phone, gas, electricity, and water.

For Cost of Credit;

● Interest rates and grace periods credit products tend to have either a fixed or a variable interest
rate. On fixed rate, is when the credit is approved and will not change during the term unless you
default. While variable rates change over the life of a loan.
● Loan duration refers to the amount of time you have to pay back the loan. On the surface, a
longer-term loan will cost less on a month-to-month basis for a borrower.
● Loan duration refers to the amount of time you have to pay back the loan. On the surface, a
longer-term loan will cost less on a month-to-month basis for a borrower.

For today, we will talk about credit instruments and other documents that may grant credit.

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 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #4

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

B. MAIN LESSON
Activity1: Content Notes (13 mins)

LO 1: EXPLAIN CREDIT INSTRUMENT, ITS FUNCTIONS AND IDENTIFY ITS COMMON TYPES.

A credit instrument is a written instrument or evidence of the existence and nature of a credit contract. It is
evidence of an obligation or a claim.

FEATURES OF A CREDIT INSTRUMENT:

● It is written evidence of the existence of an obligation on the part of the debtor, or a claim on the part of
the creditor.

● It shows the degree of risk that confronts the creditor concerning the collection of the debt.

● It shows the nature of the debtor-creditor relationship.

FUNCTIONS OF CREDIT INSTRUMENTS:

● Written documents make claims enforceable. The credit instrument enables the creditor to hold the host
instrument to collect from his debtor.
● Credit instruments facilitate exchange transactions. To increase volume production, producer’s farmers,
manufacturers, and merchants avail themselves credit both use of the proper credit instrument.
● Credit instruments minimize disputes among the contracting parties. Such instruments define the extent
of the obligations and claims of debtors and creditors
● A credit instrument facilitates production and consumption. Stocks and bonds certificates issued by
corporations that are engaged in production activities.

TERMINOLOGIES OF CREDIT INSTRUMENTS:

NEGOTIATION – refers to the art of transferring a negotiable credit instrument from one person to another in
such a way as to constitute the transferee the holder of the instrument.

HOLDER OF DUE COURSE – is the payee or endorsee of a bill of exchange or note who is in possession of
that instrument of bearer thereof.

NEGOTIABILITY – is the quality possessed by a credit instrument of value that permits legal title to it, to be
transferred from one person to another by mere delivery or endorsement.

The requisites are:

● It must be in writing.
● It must be signed by the maker or drawer.

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 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #4

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

● It must contain an unconditional promise or order to pay a sum certain in money.

● It must be payable on demand or at a fixed determinable time.
● It must be payable to order or bearer.
● Where the instrument is addressed to a drawee, he must be named therein or indicated with
reasonable certainty.

ENDORSEMENT – is the signing usually at the back of a negotiable instrument in order to guarantee or
establish the transfer of legal title over property rights.

- Blank endorsement is the signing of the instrument without specifying the evidence.
- Special endorsement is one where the endorser specifies the person to whom or to whose order the
instrument is to be payable.
- Restrictive endorsement is one where the transfer of the possession of an instrument is for a certain
purpose such as:
- To prohibit further negotiation of the instrument
- To constitute the endorsee to be the agent of the endorser
- To vest the title in the endorsee in trust for or to the use of some other persons

- Qualified endorsement is one that limits or qualifies the liability of the endorser, and is affected by writing
the words “without recourse” or “at the risk of the endorser”.

- Unconditional endorsement is one where the payment of the instrument depends on the happening of the
condition specified on the instrument.

PRESENTMENT – is the act of offering at the proper time and placing a note, a bill of exchange or the like for
acceptance, payment or discharge of liability on any credit instrument.

DISHONOR – refers to the non-payment or non-acceptance of the credit instrument by the party on whom it is
drawn.

PROTEST – is the file in writing if, upon presentment, a credit instrument is dishonored.

ACCEPTANCE-SUPRA PROTEST – refers to an agreement to pay a protested note, draft, or any other credit
instrument by a person other than the debtor.

ACCOMMODATION PHASE – refers to a promissory note that has been endorsed by one or more persons in
order that one who originally made that note may obtain credit at a financial institution, usually a bank.

PAYABLE TO BEARER – whom the instrument does not specify a person to whom payment is to be made or
whom it is payable to CASH, any bearer of the instrument is entitled to receive payment thereof.

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 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #4

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

COMMON TYPES OF CREDIT INSTRUMENTS

The vast majority of credit instruments involve a mixture of standard types. We can broadly classify the credit
instruments used by the lender as follows:

Promissory Note - A promissory note is a written promise from a buyer or a borrower to pay a certain sum of
money to his creditor or his order

Bill of exchange - A bill of exchange is order by a seller to a buyer or by a creditor to a debtor to pay a certain
sum of money to himself or to the bearer therein

Cheque - It is a written order on a printed form by a depositor to pay a sum of money to himself or somebody
else.

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 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #4

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

Kinds of Cheque:

Bearer Cheque – a payable cheque to any person who presents it for the payment at the bank counter. It can
be transferred by mere delivery and requires no endorsement.

Order Cheque - is one that can only be paid to a particular payee, who can only pass the cheque to another
person by signing his or her name behind it.

Crossed Cheque - A crossed cheque is a cheque that has been marked specifying an instruction on the way it
is to be redeemed.

Post-dated Cheque - is a cheque written by the drawer (payer) for a date in the future. Whether a post-dated
cheque may be cashed or deposited before the date written on it depends on the country.

Blank Cheque – also called carte blanche, in the literal sense is a check that has no monetary value written in,
but is already signed.

Bank Draft - A bank draft is a payment on behalf of the payer, which is guaranteed by the issuing bank. A draft
is used when the payee wants a highly secure form of payment. The bank can safely issue this guarantee
because it immediately debits the payer’s account for the amount of the check, and therefore has no risk.

Bond/ Debenture - A corporate bond or a debenture is a credit instrument in which the issuer obtains cash
from the initial investors at origination and, in return, agrees to make payments of interest and, at maturity, of
principal to holders of the securities.

LO 2: ADVANTAGES AND DISADVANTAGES OF CREDIT INSTRUMENTS

ADVANTAGES OF CREDIT INSTRUMENT

- Credit instrument reduces carrying of money to some extent

- Credit instrument makes capital more productive
- Credit enables bank to lend more than their cash reserve
- Trade and industry are financed mostly by the aid of credit
- It facilitates and extends/encourage international trade

DISADVANTAGES OF CREDIT INSTRUMENT

- Reckless borrowing can ruin both the borrower and the lender
- Credit usually costs more than paying cash. Interest and other charges may be added to the purchase
price.
- Credit ties up future income; sometimes high interests are paid.
- Credit encourages monopolies by placing large funds at disposal on few individuals or corporations

This document is the property of PHINMA EDUCATION

 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #4

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

Activity 2: Skill-building Activities (with answer key) (18 mins + 2 mins checking)

1. What is a credit instrument?

________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________

2. List some advantages and disadvantages of a credit instrument

________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________

3. Can you use a cheque even if it is not entitled to you?

________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________

Activity 3: Check for Understanding (5 mins)

Identification: Write your answers in the space provided before the number.

_________________1. This rate is set when the credit is approved and will not change during the term, unless
you default.

_________________2. An example of this is cell phones, gas and electricity, water and other utilities.

_________________3. It is the rate that changes over the life of a loan.

_________________4. It is a written instrument or evidence of the existence and nature of a credit contract. It
is evidence of an obligation or a claim.

_________________5. It refers to the art of transferring a negotiable credit instrument from one person to
another in such a way as to constitute the transferee the holder of the instrument.

_________________6. It is the signing usually at the back of a negotiable instrument in order to guarantee or
establish transfer of legal title over property right.

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 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #4

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

_________________7. It is the signing of the instrument without specifying the evidence.

_________________8. It refers to the non-payment or non-acceptance of the credit instrument by the party on
whom it is drawn.

_________________9. It is the file in writing if upon presentment, a credit instrument is dishonored.

________________10. It is a written order on a printed form by a depositor to pay a sum of money to himself
or somebody else.

True or False: Write True if the statement is correct and write false if the statement is incorrect.

_________________1. Credit instrument is a document needed for granting credit.

_________________2. Promissory note is a promise to pay as soon as possible.

_________________3. One of the disadvantages of a credit instrument is that credit enables bank to lend
more than their cash reserve.

_________________4. One of the disadvantages of a credit instrument is that reckless borrowing can ruin
both the borrower and the lender.

_________________5. Crossed cheque is a written promise from a buyer or a borrower to pay a certain sum
of money to his creditor or his order.

C. LESSON WRAP-UP
Activity 4: Thinking about Learning (5 mins)
In this part of the module, we will track your progress on how well you are doing in this subject module.
You can highlight the number of modules that you have already finished.

1. How do you feel about the learning today?

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 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #4

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

2. Are you aware of how these credit instruments work?

3. Do you use a promissory note? How do you find it when you are using it?

FAQs:
1.What is the difference between a bearer cheque and an order cheque?
- A bearer cheque is made payable to the bearer. It is payable to the person who presents it to the bank
for encashment. An order cheque is one that is payable to a particular person. The payee can transfer an order
cheque to someone else by signing his or her name on the back of it.
2. Can you protest if the credit terms are not met? Example, forcing you to pay even if it’s not yet your due date
- Yes, ofcourse, you can protest. Before they grant you credit they will allow you to sign a contract
regarding the matter. You as the borrower must read all guidelines and policies of that contract. And if in the
case the creditor breaches your contract, then you can easily protest.
3. Why is cheque a credit instrument?
- Payment for your loans is not only on a cash basis. You can always use cheques as long as you have
a checking account at the bank.

KEY TO CORRECTIONS

Activity 2

1. A credit instrument is a written instrument or evidence of the existence and nature of a credit contract. It is
evidence of an obligation or a claim.

2. (Can enumerate atleast 3 each)

ADVANTAGES OF CREDIT INSTRUMENT

- Credit instrument reduces carrying of money to some extent

- Credit instrument makes capital more productive
- Credit enables bank to lend more than their cash reserve
- Trade and industry are financed mostly by the aid of credit
- It facilitates and extend/encourage international trade

This document is the property of PHINMA EDUCATION

 FIN 012: CREDIT AND COLLECTION
STUDENT ACTIVITY SHEET #4

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: _______________________________________ Date: _______________

DISADVANTAGES OF CREDIT INSTRUMENT

- Reckless borrowing can ruin both the borrower and the lender
- Credit usually costs more than paying cash. Interest and other charges may be added to the purchase
price.
- Credit ties up future income.
- Sometimes high interests are paid.
- Credit encourages monopolies by placing large funds at disposal on few individuals or corporations

3. Yes as long as it is a Bearer Cheque because a bearer cheque is a payable cheque to any person who
presents it for the payment at the bank counter. It can be transferred by mere delivery and requires no
endorsement.

Activity 3

1. Fixed rate
2. Non Installment or Service credit
3. Variable rate
4. Credit Instrument
5. Negotiability
6. Endorsement
7. Blank Endorsement
8.Dishonor
9. Protest
10. Cheque

True or False
1. False
2. False
3. False
4. True
5. False

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