Bank Debt Instruments

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Bank debt instruments may be relatively low-risk investments.
Bank debt instruments may be relatively low-risk investments. (Image: gold bank image by John Sfondilias from <a href='http://www.fotolia.com'>Fotolia.com</a>)

A debt instrument, according to InvestorWords.com, is "a written promise to repay a debt." A bank debt instrument is such a promise to repay issued by a bank. It includes instruments typically purchased for investment purposes as well as various types of loans. Common bank debt instruments include certificates of deposit, commercial paper and promissory notes.

Promissory Note

A promissory note is a document stating that a person who borrows money from a bank will pay back the amount. To obtain a mortgage loan, for example, you will have to sign a promissory note. The document sets out the term of the loan as well as the interest rate. As a legal document, the note must be signed by both the bank and the borrower. Promissory notes also state under which circumstances a bank will be able to demand immediate repayment of the loan.

CD

A CD, or certificate of deposit, is a debt instrument offered by a bank or savings and loan. CDs bear interest and are insured by the Federal Deposit Insurance Corporation (FDIC). A CD is a time deposit, which means you agree to leave your funds in the account for a certain period of time. Short-term CDs require that the money remain in the account for a matter of months. Longer-term CD arrangements require that the investor leave the funds in place for up to six years. Account holders who remove their funds before the end of the agreed-upon term--the date of maturity--are subject to a penalty. CDs are considered investments that are low in risk; however, they also offer low returns.

Commercial Paper

Commercial paper is a short-term debt instrument that a bank or corporation typically issues to cover such credit needs as inventory and accounts receivable. Dates of maturity may be as little as two days but are typically anywhere from one to nine months. Because the instrument is unsecured--that is, not backed by collateral--only banks with high credit ratings typically issue commercial paper. Commercial paper is not considered high-risk and is often issued at a discount.

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