Note

A note, in finance, is a legal document in which one party, the issuer or borrower, promises to pay a specified sum of money to another party, the holder or lender, either on demand or at a defined future date, typically along with interest. Notes range from simple personal promissory notes between individuals to formal instruments issued by corporations and governments and actively traded in financial markets, such as treasury notes.

A note sits closely alongside a bond in the family of debt instruments, and the two terms are sometimes used loosely in everyday speech, though notes are typically shorter-term instruments than bonds, which usually describe longer-dated debt.

A note is, at heart, a written "I owe you" that spells out exactly what is owed, to whom, and by when. Where a handshake agreement relies on memory and trust, a note puts the promise in writing, which is what allows it to be enforced legally and, in many cases, bought and sold between investors who were never part of the original agreement.

This is why a note underpins so many everyday borrowing arrangements: when someone takes out a mortgage, they typically sign both a mortgage, which secures the property as collateral, and a separate promissory note, which is the actual written promise to repay the loan.

• A promissory note, a simple written promise between two parties to repay a specified amount.
• A treasury note, a government debt security with an intermediate maturity, typically between two and ten years.
• A convertible note, a type of debt that can later convert into equity, often used in early-stage company financing.
• A mortgage note, the written promise to repay accompanying a mortgage loan.

The practical distinction between a note and a bond is mostly one of maturity and context rather than a strict legal rule: notes are generally associated with shorter maturities and simpler structures, while bonds are generally longer-dated and more heavily traded in public markets, though the line between the two is not always sharply drawn.

A note can be either secured or unsecured, depending on whether it is backed by specific collateral. A mortgage note is secured, since the underlying property can be seized through foreclosure if the borrower defaults, while many promissory notes between individuals, or corporate notes issued without specific collateral, are unsecured, relying purely on the borrower's creditworthiness and legal obligation to repay. Secured notes generally carry lower interest rates than unsecured notes of similar risk, reflecting the lender's reduced exposure if the borrower fails to pay.

Because a note is a negotiable legal instrument in many cases, it can sometimes be sold or transferred to another party, who then steps into the original lender's position as the party entitled to repayment, a common feature of mortgage notes that are later sold into the secondary mortgage market.

Companies frequently issue notes as a way to raise capital from investors without immediately diluting ownership through issuing new shares, offering a fixed or variable interest payment in exchange for the loaned funds and promising repayment of the principal at maturity. Convertible notes add a further feature, allowing the note to later convert into equity under specified conditions, a structure particularly common when early-stage companies raise initial funding from investors before the company's valuation has been firmly established through a formal pricing round.

Because notes represent a direct, enforceable promise to repay, note holders generally rank ahead of equity shareholders in the event a company becomes insolvent, reflecting the different risk and reward profile between lending to a company through a note and owning a share of it outright.

A note's enforceability generally depends on it meeting basic legal requirements, including a clear statement of the amount owed, the parties involved, and the terms of repayment, with poorly drafted notes between individuals sometimes proving difficult to enforce in court if these essential details are missing or ambiguous.