Commercial Paper

6 Key excerpts on "Commercial Paper"

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  eBook - PDF

  Financial Matrix

  • Jhajra, Anil Kumar(Authors)
  • 2021(Publication Date)
  • Scholars World

    (Publisher)

  Issues typically have maturities of less than 270 days with maturity most commonly in the 30 day to 50 day range. Commercial Paper is usually offered at a discount reflecting current market interest rates. The Commercial Paper market represents a large and important part of the fixed income market. In some years the size of the U.S. Commercial Paper market has exceeded that of the U.S. treasury market. Why do companies issue Commercial Paper? Commercial Paper provides an alternative to bank borrowing for large corporations with strong credit ratings. The cost of borrowing by issuing Commercial Paper is generally cheaper and less restrictive than This ebook is exclusively for this university only. Cannot be resold/distributed. borrowing from a bank. Commercial Paper is often used to provide short-term funds for seasonal and working capital needs. It is also used as bridge financing to provide funds until long-term financing is acquired. Issues with less than 270 days to maturity are exempt from SEC registration thus saving the issuer the costs associated with registration. The largest issuers are generally financial firms and captive finance companies. What are the different kinds of Commercial Paper? The Commercial Paper market is generally divided into corporate issued Commercial Paper and asset backed Commercial Paper. Corporate issued Commercial Paper is unsecured debt representing an obligation of the issuing entity. Corporate issuers of Commercial Paper are often divided into financial and non-financial companies. Asset-backed Commercial Paper is issued by a special purpose vehicle or conduit that generally uses the proceeds of issuance to obtain interests in various types of assets. The Federal Reserve Board publishes yield and outstanding amount information on the financial, non-financial and asset backed portions of the Commercial Paper market. There is also a large market for Municipal Commercial Paper.

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  eBook - ePub

  The Bank Credit Analysis Handbook

  A Guide for Analysts, Bankers and Investors

  • Jonathan Golin, Philippe Delhaise(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  51 Typical maturities are 50 days or less. Finance companies are major issuers of Commercial Paper.

  Commercial Paper

  Commercial Paper is a money-market instrument that is analogous to a T-bill and municipal note. It is, however, issued by commercial firms, including industrial corporations and banks, rather than by government.

  Repo Finance

  Repo and reverse repo transactions, together with security lending, are forms of short-term borrowing collateralized by high-grade securities. Repo comprises a transaction in which a party with securities in its possession (ordinarily highly rated investment-grade fixed-income securities) sells the securities to a buyer in exchange for cash, subject to an obligation to repurchase the securities from the seller at a premium at a specified time. The period of time is typically short term, but repos of long duration, for example, one year or longer, are not unknown.

  Substance vs. Form

  Although the transaction takes the form of a sale and repurchase of securities, economically a repo constitutes collateralized institutional borrowing. That is, transacting a repo is equivalent to lending cash with the simultaneous “purchase” of securities as collateral to the counterparty that has advanced the funds. In the same vein, the difference between the sale price and the repurchase price (which will invariably be higher than the sale price) is the economic equivalent of an interest payment by the seller/repurchaser (the cash “borrower”) to the buyer/reseller (the cash “lender”) of the securities. When one party transacts a repo, the other party is simultaneously transacting a reverse repo. In other words, both terms refer to an identical transaction. Therefore, in a reverse repo, the “seller” of the securities effectively borrows cash from the “buyer,” again with the securities as collateral for the term of the transaction.

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  No longer available |Learn more

  Business Law

  • Robert W. Emerson, Barron's Educational Series(Authors)
  • 2016(Publication Date)
  • Barrons Educational Services

    (Publisher)

  COMMERCIAL RELATIONS

  10  

  NEGOTIABLE INSTRUMENTS: DEFINITIONS, CONCEPTS, AND NEGOTIATION

  KEY TERMS

  Commercial Paper in its broadest sense, documents used to facilitate the transfer of money or credit

  negotiable instrument a type of Commercial Paper; a written, signed, unconditional promise or order to pay a fixed amount of money to order or bearer either on demand or at a definite time

  negotiation the process by which both possession of, and title to, an instrument are transferred from one party to another, with the transferee becoming a holder

  holder a person who possesses a negotiable instrument issued, drawn, or indorsed to that person or his/her order or to bearer

  The term “Commercial Paper” encompasses a variety of documents used to facilitate the exchange of money, including extensions of credit. There are two important types of Commercial Paper: a promise to pay money (e.g., the promissory note and the certificate of deposit) and an order to pay money (e.g., the draft and the check).

  Chapters 10 through 12 will discuss the major forms of Commercial Paper and the uniform law governing those forms. THE NEGOTIABLE INSTRUMENT AS A FORM OF Commercial Paper

  The development and use of Commercial Paper resulted from, and in turn helped to accelerate, the growth of trade. As the words themselves suggest, only after the development of commerce did people need commercial paper. Once it became impracticable to pay always in cash or commodities, society needed a money substitute that would have the ready acceptability of cash, but would entail much less risk of loss or theft. Various types of Commercial Paper, including the check, have met these requirements.

  Commercial Paper, though, is not merely a substitute for cash. It can also serve as a means of extending credit. The borrower agrees in writing to repay his/her loan, and that document (e.g., a promissory note), like a simple money-substitute document (e.g., a check), is a special type of Commercial Paper: the negotiable instrument

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  eBook - PDF

  Fixed Income Analysis

  • (Author)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  A company could also experience some sort of financial distress such that it could only issue new Commercial Paper at significantly higher rates. In this case, the company could draw on its credit lines instead of rolling over its paper. Most Commercial Paper issuers maintain 100% backing, although some large, high-credit-quality issues carry less than 100% backing. Backup lines of credit typically contain a “material adverse change” provision that allows the bank to cancel the backup line of credit if the financial condition of the issuer deteriorates substantially. Historically, defaults on Commercial Paper have been relatively rare, primarily because Commercial Paper has a short maturity. Each time existing paper matures, investors have another opportunity to assess the issuer’s financial position, and they can refuse to buy the new paper if they estimate that the issuer’s credit risk is too high. Thus, the Commercial Paper markets adapt more quickly to a change in an issuer’s credit quality than do the markets for longer-term securities. This flexibility reduces the exposure of the Commercial Paper market to defaults. In addition, corporate managers realize that defaulting on Commercial Paper would likely prevent any future issuance of this valuable financing alternative. The combination of short-dated maturity, relatively low credit risk, and a large number of issuers makes Commercial Paper attractive to a diverse range of investors, including money market mutual funds, bank liquidity desks, corporate treasury departments, and other insti- tutional investors that have liquidity constraints. Most Commercial Paper investors hold their position to maturity. The result is little secondary market trading except for the largest issues. Investors who wish to sell Commercial Paper prior to maturity can sell it either back to the dealer, to another investor, or in some cases, directly back to the issuer.

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  eBook - ePub

  The Harvard Business Review Entrepreneur's Handbook

  Everything You Need to Launch and Grow Your New Business

  • Harvard Business Review(Author)
  • 2018(Publication Date)
  • Harvard Business Review Press

    (Publisher)

  Thus far in this chapter, we’ve described supplier trade credit, bank loans, and common stock issues as important forms of external financing. Today’s mature corporations also use a few other important forms of financing:

  • Commercial Paper: Large corporations with high credit ratings often use the sale of Commercial Paper to finance their short-term requirements. They use it as a lower-cost alternative to short-term bank borrowing. Commercial Paper is a short-term debt security, generally reaching maturity in 2 to 270 days. Most paper is sold at a discount from its face value and is redeemable at face value on maturity. The difference between the discounted sale price and the face value represents interest to the purchaser of the paper. Investors having temporary cash surpluses are the usual purchasers of Commercial Paper; for them it is a reasonably safe way to obtain a return on their idle cash.
  • Bonds: A bond is also a debt security (an IOU), usually issued with a fixed interest rate and a stated maturity date. The bond issuer has a contractual obligation to make periodic interest payments and to redeem the bond at its face value on maturity. Bonds may have short-, intermediate-, or long-term maturities (e.g., from one to thirty years). Generally, they pay a fixed interest rate on a semiannual basis.
  • Preferred stock: This type of equity security is similar to a bond in that it pays a stated dividend to the shareholder each year, and after the shares begin trading in the secondary market, then the share prices, like bonds, fluctuate with changes in market interest rates and the creditworthiness of the issuer. Also like bonds, preferred stock is used by some corporations as an external form of equity financing.

  Matching assets and financing

  One of the principles of financing—whether the funding is to start a company, maintain its operations, or advance its growth—is to make a proper match between the assets and their associated forms of financing. The general principle is to finance current (short-term) assets with short-term financing, and long-term assets with long-term or permanent financing.

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  eBook - ePub

  2024 CFA Program Curriculum Level I Box Set

  • (Author)
  • 2023(Publication Date)
  • Wiley

    (Publisher)

  backup line of credit from banks, also referred to as a liquidity enhancement or backup liquidity lines. The purpose of the backup lines of credit is to ensure that the issuer can fully repay maturing Commercial Paper if a rollover is not possible. Given their short maturity, Commercial Paper markets adapt quickly to adverse credit events and defaults are relatively rare.

  Apart from non-financial corporations, the largest Commercial Paper issuers include financial institutions, governments, and supranational agencies. Commercial Paper issued in the international market is known as EuroCommercial Paper (ECP). Although similar to United States Commercial Paper (USCP), typical ECP transaction sizes are much smaller and less liquid than the USCP market.

  2.3. Short-Term Funding Alternatives for Financial Institutions

  Common bank sources and uses of funding are shown in Exhibit 2. The short-term funding needs of financial institutions, such as banks, arise from their role as intermediaries between borrowers and depositors. In addition to cash and reserves, most bank assets are loans issued or securities purchased. Liabilities include deposits received from households and firms, securities sold, or short-term borrowing.

  Exhibit 2: Bank Short-Term Funding Sources and Uses

  2.3.1. Deposits

  Household (or retail) and commercial deposits are a primary source of short-term funding for most banks. These are usually in the form of checking accounts , or deposits with no stated maturity available for transactional purposes that pay little or no interest. Although these so-called demand deposit balances may be withdrawn at any time, fee rebates, uncommitted credit lines, and other services extended by banks under normal business conditions to their commercial customers allow them to rely on this stable source to meet both short-term and longer-term funding needs. For larger depositors, these so-called operational deposits

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