Commercial paper is a money-market security issued by large banks and corporations. In Economics, a financial market is a mechanism that allows people to easily buy and sell ( Trade) financial Securities (such as stocks and bonds The bond market (also known as the debt, credit, or fixed income market) is a Financial market where participants buy and sell Debt Fixed income refers to any type of Investment that yields a regular (or fixed return A Corporate Bond is a bond issued by a Corporation. The term is usually applied to longer-term debt instruments generally with a maturity date falling at least a A government bond is a bond issued by a national government denominated in the country's own Currency. In the United States, a municipal bond (or muni) is a bond issued by a city or other local government or their agencies Bond valuation is the process of determining the Fair price of a bond. In Finance, a high yield bond ( non-investment grade bond, speculative grade bond or junk bond) is a bond that is rated below A stock market, or (equity market is a private or public market for the trading of company Stock and derivatives of company Software for Fixed assets management and Stock control developed in 2004. Preferred stock, also called preferred shares or preference shares, is typically a higher ranking stock than Voting shares, and its terms are negotiated A voting share (also called common stock or ordinary share) is a share of Stock giving the Stockholder the right to vote on matters A Registered share is a Stock that is registered on the name of the exact owner A voting share (also called common stock or ordinary share) is a share of Stock giving the Stockholder the right to vote on matters A stock exchange, share market or bourse is a Corporation or Mutual organization which provides "trading" facilities for Stock The foreign exchange ( currency or forex or FX) market refers to the market for currencies. The derivatives markets are the Financial markets for derivatives The market can be divided into two that for exchange traded derivatives and that for In Finance, a credit derivative is a derivative whose value derives from the Credit risk on an underlying bond loan or other financial asset '"Hybrid securities"' often referred as "hybrids" are a broad group of securities that combine the elements of the two broader groups of securities Debt and Options are financial instruments that convey the right but not the obligation to engage in a future transaction on some Underlying security, or in a Futures In Finance, a futures contract is a standardized Contract, traded on a Futures exchange, to buy or sell a certain Underlying instrument A forward contract is an agreement between two parties to buy or sell an asset at a specified point of time in the future For the Thoroughbred horse racing champion see Swaps (horse. In finance a swap is a derivative in which two counterparties Commodity markets are markets where raw or primary products are exchanged In Finance, the money market is the global Financial market for short-term borrowing and lending Over-the-counter ( OTC) trading is to Trade Financial instruments such as Stocks bonds, commodities or derivatives Real estate is a legal term (in some jurisdictions notably in the USA, United Kingdom The spot market or cash market is a Commodities or Securities market in which goods are sold for Cash and delivered immediately The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated In Economics, a financial market is a mechanism that allows people to easily buy and sell ( Trade) financial Securities (such as stocks and bonds There are two basic financial market participant categories Investor vs Corporate finance is an area of Finance dealing with the financial decisions Corporations make and the tools and analysis used to make these decisions Personal finance is the application of the principles of Finance to the monetary decisions of an individual or family unit Public finance is a field of economics concerned with paying for collective or governmental activities and with the administration and design of those activities A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money Financial regulations are a form of Regulation or supervision which subjects Financial institutions to certain requirements restrictions and guidelines aiming to In Finance, the money market is the global Financial market for short-term borrowing and lending A security is a Fungible, Negotiable instrument representing financial value A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money A corporation is a separate legal entity usually used to conduct business It is generally not used to finance long-term investments but rather to purchase inventory or to manage working capital. Working capital, also known as net working capital, is a financial metric which represents operating liquidity available to a business It is commonly bought by money funds (the issuing amounts are often too high for individual investors), and is generally regarded as a very safe investment. Money funds (or money market funds, money market mutual funds) are Mutual funds that invest in Short-term debt instruments As a relatively low-risk investment, commercial paper returns are not large. There are four basic kinds of commercial paper: promissory notes, drafts, checks, and certificates of deposit. A promissory note, also referred to as a note payable in Accounting, is a Contract where one party (the maker or issuer) makes an A banker's acceptance, or BA, is a time draft drawn on and accepted by a Bank. A certificate of deposit or CD is a Time deposit, a financial product commonly offered to consumers by Banks thrift institutions, and
Because commercial paper maturities do not exceed 270 days and proceeds typically are used only for current transactions, the notes are exempt from registration as securities with the United States Securities and Exchange Commission. The US Securities and Exchange Commission (commonly known as the SEC) is an independent agency of the United States government which holds primary responsibility
Commercial paper is defined in Canada as having a maturity of not more than one year and is exempt from dealer registration and prospectus requirements. [1]
Commercial paper essentially can be compared as an alternative to lines of credit with a bank. Once a business becomes large enough, and maintains a high enough credit rating, then using commercial paper is always cheaper than using a bank line of credit. Nevertheless, many companies still maintain bank lines of credit to act as a "backup" to the commercial paper. In this situation, banks often charge fees for the amount of the line of the credit that does not have a balance. While these fees may seem like pure profit for banks, if the company ever actually needs to use the line of credit it would likely be in serious trouble and have difficulty repaying its liabilities.
Currently, more than 1,700 companies in the United States issue commercial paper. The United States of America —commonly referred to as the Financial companies comprise the largest group of commercial paper issuers, accounting for nearly 75 percent of the commercial paper outstanding at mid-year 1990. Financial-company paper is issued by firms in commercial, savings and mortgage banking; sales, personal and mortgage financing; factoring; finance leasing and other business lending; insurance underwriting; and other investment activities. The remaining commercial paper outstanding at mid-year 1990 -- over 25 percent -- was issued by nonfinancial firms such as manufacturers, public utilities, industrial concerns and service industries.
Commercial paper was invented by Percy "Max" Hall, Vice President of Manufacturers Hanover Trust Bank, in the 1920's.
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Issuing commercial paper
There are two methods of issuing paper. The issuer can market the securities directly to a buy and hold investor such as most money funds. Buy and hold is a Long term Investment strategy based on the concept that in the long run Financial markets give a good rate of return despite periods of Alternatively, it can sell the paper to a dealer, who then sells the paper in the market. The dealer market for commercial paper involves large securities firms and subsidiaries of bank holding companies. A security is a Fungible, Negotiable instrument representing financial value A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money Most of these firms also are dealers in US Treasury securities. Treasury securities are Government bonds issued by the United States Department of the Treasury through the Bureau of the Public Debt. Direct issuers of commercial paper usually are financial companies that have frequent and sizable borrowing needs and find it more economical to sell paper without the use of an intermediary. In the United States, direct issuers save a dealer fee of approximately 5 basis points, or 0. 05% annualized, which translates to $50,000 on every $100 million outstanding. This saving compensates for the cost of maintaining a permanent sales staff to market the paper. Dealer fees tend to be lower outside the United States.
See also
Notes and References
- ^ Ontario Securities Commission National Instrument 45-106 (Section 2. 35) Accessed 2007-01-30
External links
- Federal Reserve System release on commercial papers
- Commercial paper - Encyclopedic entry
- An article from The Times on commercial paper and credit market vernacular
- CP Daily - Premium provider of research and searchable databases relating to global CP and ECP markets.
- Stepek, John. What's wrong with commercial paper?MoneyWeek, August 31, 2007 - How the subprime crisis has affected the commercial paper market
- What is Commercial Paper? - Mortgage News Daily
- Fed Bank of Richmond, VA - History of origin, and special regulations governing issue of commercial paper. MoneyWeek is an investment Magazine (weekly and website It covers financial and economic news and provides commentary and analysis across UK and global markets Thomas K Hahn, Federal Reserve Bank of Richmond
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