Commercial Paper/CP

 

Commercial paper is structurally similar to a CD or T-Bill, but they are issued by corporates. Corporates issue commercial papers to raise money to meet their short term requirements. Compared to CDs and T-Bills they are less secured instruments. There are restrictions on corporates to issue CPs. Corporates issuing CPs must have a very good balance sheet size.

CPs are issued at a discount to their face value. They have a fixed maturity period after which the investors get the face value of the CP. Corporates approach dealer banks for raising money through commercial papers. Unlike corporates bonds issue, which are issued all at a time, CPs are issued time to time and pay back from time to time. Dealer banks charge a small commission from corporates for doing so. In case, lenders can’t be found to in time dealer banks themselves may lend the amount.

CPs must be rated by a recognized credit rating agency. Funds raised through CPs do not represent fresh borrowings for the corporate issuer but merely substitute a part of the banking limits available to it. Therefore, a company issues CPs to save on interest costs i.e. it issues CPs only when the situation is such that CPs rates are lower than the rate at which it borrows money from its banking association.

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June 22, 2008 | Filed Under Bonds 

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