Definition
In financial terminology, “On Demand” refers to an obligation or repayment that must be fulfilled upon the request of the holder or the payee. This term is commonly used in reference to instruments like notes payable and demand notes, where the amount owed must be paid immediately when the holder requests it.
A note payable on demand is a type of financial instrument that requires repayment as soon as the holder requests it. If no specific due date is mentioned, this note is referred to as a demand note.
Examples
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Demand Note Example: Smith loans $5,000 to Jones with a demand note. Jones must repay the loan whenever Smith requests the repayment.
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Note Payable on Demand Example: A small business takes a loan from a bank with a clause that specifies the loan is payable on demand. The business must repay the loan immediately when the bank requests it, even if it is not past the typical monthly payment date.
Frequently Asked Questions (FAQs)
What is the difference between a demand note and a note payable on demand?
A demand note is a type of note payable on demand but is specifically used when no due date is mentioned. Both require repayment upon request.
Can interest be charged on a demand note?
Yes, interest can be charged on a demand note, but the terms must be specified in the agreement.
What are the advantages of having a note payable on demand for lenders?
Lenders benefit from the flexibility and security of being able to demand repayment at any time, which reduces the risk of default.
Is there any notice period before the amount is demanded in these notes?
These notes usually do not require a notice period; repayment is due immediately upon the lender’s request, unless otherwise specified in the terms.
What happens if the borrower is unable to pay when the amount is demanded?
If the borrower cannot repay the amount on demand, it can lead to default, and the lender may take legal action to recover the owed sum.
- Promissory Note: A written promise to pay a specific amount of money at a certain date or on demand.
- Loan Agreement: A contract between a borrower and a lender outlining the terms and conditions of the loan.
- Maturity Date: The date on which a loan or financial instrument becomes due for repayment.
- Interest Rate: The proportion of a loan charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.
Online References
Suggested Books for Further Studies
- “The Basics of Financial Derivatives: Markets, Products, and Applications” by Robert W. Kolb
- “Fundamentals of Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, and Bradford D. Jordan
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
Fundamentals of On Demand: Finance Basics Quiz
### What does the term "on demand" mean in financial terminology?
- [x] An obligation must be fulfilled upon request.
- [ ] Payments are deferred to a later date.
- [ ] Payments are made at regular intervals.
- [ ] An obligation has no repayment requirement.
> **Explanation**: In financial terminology, "on demand" means that an obligation or repayment must be fulfilled when requested by the holder or payee.
### Can interest be applied to a demand note?
- [x] Yes, if it is specified in the agreement.
- [ ] No, demand notes cannot bear interest.
- [ ] Only for commercial entities.
- [ ] Only if the principal amount is above $10,000.
> **Explanation**: Interest can be charged on a demand note if it is explicitly stated in the terms of the agreement.
### When is a note specified as "payable on demand"?
- [x] When the amount is due immediately upon request.
- [ ] When the note specifies a future date.
- [ ] When the repayment is uncertain.
- [ ] When periodic payments are required.
> **Explanation**: A note is specified as "payable on demand" when the amount owed must be repaid as soon as the lender requests it.
### What legal action can a lender take if a borrower defaults on a demand note?
- [x] Legal action to recover the owed sum.
- [ ] Forfeit the loan.
- [ ] Extend the repayment terms indefinitely.
- [ ] Suspend interest payments.
> **Explanation**: If a borrower defaults on a demand note, the lender can take legal action to recover the owed amount.
### What is a promissory note?
- [x] A written promise to pay a specific amount of money.
- [ ] An informal loan agreement.
- [ ] A note without a repayment obligation.
- [ ] A document that specifies non-financial obligations only.
> **Explanation**: A promissory note is a written promise committing the borrower to pay a specific amount of money under certain terms.
### What must be included in a note payable on demand?
- [x] The agreement that repayment is due on request.
- [ ] The borrower's employment history.
- [ ] Collateral assurance only.
- [ ] Monthly repayment schedule.
> **Explanation**: A note payable on demand must include terms stating that the repayment is due as soon as the lender requests it.
### How does a loan agreement differ from a demand note?
- [x] A loan agreement typically specifies repayment terms over a period, whereas a demand note requires payment on request.
- [ ] A loan agreement cannot include interest.
- [ ] Demand notes are informal and not legally binding.
- [ ] Loan agreements have no fixed repayment date.
> **Explanation**: A loan agreement specifies detailed repayment terms often spread over a period, in contrast to a demand note, which requires payment immediately upon request.
### What is a primary advantage of demand notes for lenders?
- [x] Flexibility to demand repayment anytime.
- [ ] Guaranteed lower interest rates.
- [ ] Payments are made automatically.
- [ ] Long-term income stream.
> **Explanation**: Demand notes provide lenders the flexibility to request repayment at any time, reducing the risk of default.
### When does the maturity date of a demand note occur?
- [ ] On December 31st each year.
- [ ] At the inception of the note.
- [x] When the lender demands repayment.
- [ ] When the borrower decides.
> **Explanation**: The maturity date of a demand note occurs when the lender requests repayment, as there is no fixed date specified beforehand.
### What happens if a demand note includes no specified due date?
- [x] It is considered a demand note requiring repayment upon lender's request.
- [ ] It becomes non-collectible.
- [ ] It is void.
- [ ] It defaults automatically.
> **Explanation**: If a demand note includes no specified due date, it is considered a demand note, and the repayment is due whenever the lender requests it.
Thank you for exploring the intricate details of “On Demand” in financial contexts and engaging with our quiz. Enhance your financial knowledge for utmost proficiency!
