Commercial paper is a particular item which had come into existence in United States of America in the year 1986. It is being in the footprints of at least the 19th century. The banking intermediary is being used as a middle man and the same has been cut with the introduction of commercial paper. Commercial paper has allowed the treasurer for avoidance of issuing promissory notes directly towards large financial institutions or to corporate ventures with temporary excess liquidity.
Commercial paper is an example of disinter mediation and it helps in ensuring that the gap in lending rate of bank and the rate at which it is being paying to the depositors is being reduced to a certain extent. This shows that, this particular source is being cheaper in comparison to the money market instruments which are being used at a particular pint of time. This is going to help in attaining positive results in the area of doing the tasks which are being identified at a particular point of time.
It is only in the rare cases where commercial paper is being responsible for maintenance of internal liquidity within the organisation. It is being identified that, liquidity is something which could be projected with the help of three different ratios. The ratios include current ratio, quick ratio and cash ratio (Adrian, 2010). The ability of the organisation to make sale of high grade commercial paper also works in a positive way in the course of identification of liquidises of the organisation.
Who issued Commercial Paper?
This is an unsecured means of financial instrument. In the course of commercial paper, it is being identified that only the largest firms with highest credit ratings are being involved in issued of commercial paper. Only the blue chip companies can move forward for the insurance of commercial paper to the investors.
Characteristics of Commercial Paper
The bifurcation of characteristics of commercial paper is as under
- It is a short term promissory note
- It is unsecured in nature
- It is a negotiable financial instrument which is being used in money market
- It is being transferrable by way of endorsement
- This can be delivered within a fixed period of maturity
- It is being used by large credit worthy organizations in the area of doing the working at a particular point of time.
- It has maturity period of around 9 months
Rating of Commercial Paper
A credit rating agency in the name of nationally recognised statistical rating organisation is being involved in rating of commercial paper in the country. Earlier there was no rule in the course of commercial paper but now the things have changed and commercial paper is being used by the organisation for the purpose of doing its tasks at a particular point of time. Exchange commission has made it mandatory for the organisation in the course of usage of commercial paper at a particular point of time.
Types of US Commercial Paper Programs
There are two kinds of commercial paper programs being identified in the United States of America. The programs include 3(a) (3) program and 4(a) (2) program. These programs are being formulated on the basis of guidelines of US Securities and Exchange Commission. According to 3(a) (3) program, it is essential that:
- Commercial paper should be negotiable and must be of prime quality
- It is to be of a particular type which is not ordinarily purchased by general public
- It is to be of a kind which is eligible for discounting by Federal Reserve banks
- It is being used for facilitating current transactions
Distribution of Commercial Paper
The programs are being at certain times termed as placement agents. Commercial paper being issued by organisations through broker is being considered after taken upon the necessary terms and conditions (Coyle, 2002). The brokers buy daily issuance of an individual and resell the same to other new investors. There is no participation of guidance in the course of commercial paper at a particular point.
Use for Bridge
This instrument is being used by organisations which are in the category of credit worthy organisations. This is being done for the purpose of bridge financing. In this case, there are certain things to be taken into consideration. The company is in the need of long term finance for buying plant and machinery which is to be installed by it. If the organisation raises funds in the capital market then, it would require high level of flotation cost. Therefore, the organisation uses commercial paper for raising funds. With the help of commercial paper, the flotation cost of the organisation is being met easily at low prices. This particular thing is being term as Bridge financing.
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