Explains the reason of commercial paper is an alternative to short-term bank borrowing for a corporation: … It
is a low cost alternative to bank loans and large amount can be raised quickly and efficiently
. As the corporation with high credit ratings issue commercial paper, it’s a low cost alternative to bank loans.
Why commercial paper is a source of short term finance?
The commercial paper provides a convenient financing method because
it allows issuers to avoid the hurdles and expense of applying for and securing continuous business loans
, and the Securities and Exchange Commission (SEC) does not require securities that trade in the money market to be registered.
Why do banks use commercial paper?
Bank holding companies use the com- mercial paper market to finance primarily banking- related activities such as leasing, mortgage banking, and consumer finance. of the money market, commercial paper is
sold to raise large sums of money quickly and for short periods of time
.
What are the advantages of commercial paper?
Advantages of Commercial Paper
Contributes Funds
– It contributes extra funds as the cost of the paper to the issuing company is cheaper than the loans of the commercial bank. Flexible – It has a high liquidity value and flexible maturity range giving it extra flexibility.
Why does commercial paper have a maturity of less than 270 days?
Why do commercial paper issues have an original maturity of 270 days or less? It may be defined as
a promissory note which is usually insecure in nature
. It is generally issued for a period of one year or less. It is typically issued by large corporate houses to fulfill the short-term requirements.
What is the minimum amount at which commercial paper can be issued?
At present, CP can be issued in denominations of
Rs. 5 lakh
or multiple thereof and the amount invested by a single investor should not be less than Rs. 5 lakh (face value).
Can a bank issue commercial paper?
14. CP will be issued at a discount to face value as may be determined by the issuer. 15.
Banks and all-India financial institutions are prohibited from underwriting or co-accepting issues of Commercial Paper
.
What is the maturity period of commercial paper?
CPs have a
minimum maturity of seven days and a maximum of up to one year from the date of issue
. However, the maturity date of the instrument should typically not go beyond the date up to which the credit rating of the issuer is valid. They can be issued in denominations of Rs 5 lakh or multiples thereof.
What is the commercial paper market?
Commercial paper is
a money-market security issued (sold) by large corporations to obtain funds to meet short-term debt obligations
(for example, payroll) and is backed only by an issuing bank or company promise to pay the face amount on the maturity date specified on the note.
What is the difference between commercial paper and commercial bill?
Commercial paper and commercial bill are both financial instruments used by banks. Commercial paper is used by banks to
raise finances
for a short time period. … Commercial paper is used by banks to meet their short-term obligations, while commercial bills help companies to get money in advance, for sales they make.
What is the advantage and disadvantage of commercial paper?
One benefit of commercial papers is that, it is
a cost effective way of financing working capital
. The cost of commercial papers to the issuing firm is lower than the cost of securing a commercial bank loans. As commercial papers are required to be rated, good rating reduces the cost of capital for the company.
Who can issue the commercial paper?
12. CP may be issued to and held by
individuals, banking companies
, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs).
What is an example of commercial paper?
An example of commercial paper is when
a retail firm is looking for short-term funding to finance some new inventory for an upcoming holiday season
. … This interest rate can be adjusted for time, contingent on the number of days the commercial paper is outstanding.
Why do commercial paper issues have an original maturity of 270 days or less LG 5 2?
According to page 149 of our textbook, commercial paper issues have an original maturity of 270 days or less because of a Securities and Exchange rule that states that
securities with a maturity of more than 270 days has to go through the time-consuming and high cost registration process to become a public debt
…
Can commercial paper be longer than 270 days?
If a corporation needs to raise money for short term purposes, issuing commercial paper is a great way to do it. Investors purchase commercial paper at a discount and the issuer pays back the par value at maturity.
The maximum maturity for commercial paper is 270 days
.
What is the difference between bank loans and commercial paper?
With commercial loans,
the risk lies with the lender
. Lenders protect themselves against risk by adjusting interest rates on the loan accordingly. … If a business poses a higher risk of defaulting, then the interest rate is higher on the commercial loan. With commercial paper, the risk lies with the investor.
