Commercial paper

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Commercial paper , in global financial markets, is an unsecured promissory note with a fixed term of not more than 364 days.

Commercial paper is a money market security issued (sold) by large companies to obtain funds to meet short-term debt obligations (for example, payroll), and is only supported by issuing banks or companies pledging to pay the nominal amount on a specified due date on the record. Since it is not supported by guarantees, only companies with excellent credit ratings from a recognized credit rating agency will be able to sell their commercial papers at a reasonable price. Commercial paper is usually sold at a discounted price of the nominal value, and generally carries a lower interest payment rate than a bond due to a shorter period of commercial paper. Usually, the longer the maturity of a note, the higher the interest rate the issuing institution will issue. Interest rates fluctuate with market conditions, but are usually lower than bank rates.

Commercial papers - though short-term liabilities - are issued as part of a continuous roll program, which may last for several years (as in Europe), or open (as in the US).

Video Commercial paper

Ikhtisar

The use of commercial paper has been adopted by every state in the United States except Louisiana.

By the end of 2009, more than 1,700 companies in the United States issued commercial paper. On October 31, 2008, the US Federal Reserve reported seasonally adjusted figures for the end of 2007: $ 1,7807 trillion (short-scale, or 1,780,700,000,000) in total commercial paper; $ 801.3 billion is "supported assets" and $ 979.4 billion is not; $ 162.7 billion from the last issued by non-financial companies, and $ 816.7 billion issued by financial companies.

Outside the United States, the international Commercial-European Paper Market has over $ 500 billion in outstandings, which consists of instruments dominated by the euro, the dollar, and sterling.

Maps Commercial paper

History

Commercial credit, in the form of promissory notes issued by the company, has existed since at least the nineteenth century. For example, Marcus Goldman, founder of Goldman Sachs, started trading in New York in 1869.

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Publishing

Commercial papers - albeit short-term liabilities - are published as part of a significantly longer sustainable program, which may take several years (as in Europe), or be open (as in the US). Due to a continuous commercial paper program much longer than individual commercial papers in the program (which should not be more than 270 days), because commercial paper matures are replaced with newly issued commercial paper for the remaining amount of liability. If the maturity date is less than 270 days, the issuer does not need to file a registration statement with the SEC, which means delays and increased costs.

There are two methods of granting credit. Publishers can market securities directly to investors who buy and hold like most money market funds. Or, can sell the paper to the dealer, who then sells paper in the market. The dealer market for commercial paper involves large securities firms and subsidiaries of parent companies. Most of these companies are also dealers in US Treasury securities. Direct publishers of commercial paper are usually financial companies that have frequent and large loan needs and find it more economical to sell paper without the use of intermediaries. In the United States, direct publishers save dealer costs about 5 basis points, or 0.05% per year, which means $ 50,000 in every $ 100 million outstanding. These savings compensate for the maintenance costs of the permanent sales staff to market the paper. Dealer fees tend to be lower outside the United States.

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Credit line

Commercial paper is a low cost alternative to the line of credit with the bank. Once the business becomes established, and builds a high credit rating, it is often cheaper to use commercial paper than on a bank credit line. However, many companies still maintain bank credit lines as "reserves". Banks often charge for the number of lines of credit that do not have a balance, because under the regulatory regime capital set by Basel Accords, the bank should anticipate that an unused line of credit will be withdrawn if a company is experiencing financial difficulties. Therefore they should set aside equity capital to account for potential loan losses as well as on the part of credit lines that are not currently in use, and will typically charge for the cost of this equity capital. Advantages of commercial paper:

• High credit ratings result in lower capital costs.
• Maturity provides more flexibility.
• There is no lien on the company's assets.
• Tradability of Commercial Paper gives investors an exit option.

Disadvantages of commercial paper:

• Its use is limited only to blue chip companies.
• Commercial paper issuance lowers bank credit limits.
• A high level of control is performed on Commercial Paper issues.
• Standby credits may become necessary

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Commercial paper results

Like treasury bills, the results on commercial papers are cited based on discounts - discounts to commercial paper holders are the annual percentage difference between the price paid for paper and the nominal value using the 360-day year. Specifically, where ${\ displaystyle dy_ {CP}}$ is the result of the discount, ${\ displaystyle P_ {f}}$ is a nominal value, ${\ displaystyle P_ {0}}$ are paid prices, and ${\ displaystyle t}$ is a long term paper within a few days:

${\ displaystyle dy_ {CP} = ({\ frac {P_ {f} -P_ {0}} {P_ {f}}}). {\ frac {360} {t}}} Â Â$

dan ketika dikonversi ke hasil setara obligasi ( ${\ displaystyle bey_ {CP}}  ÂÂ$ ):

${\ displaystyle bey_ {CP} = ({\ frac {P_ {f} -P_ {0}} {P_ {0}}}). {\ frac {365} {t}}}  ÂÂ$

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Default

Defaults on high-quality commercial paper are rare, and cause concerns when they occur. Important examples include:

• On June 21, 1970, Penn Central filed for bankruptcy under Chapter 7 of the US Bankruptcy Code and failed to pay about $ 77.1 million of commercial paper. This sparked runoff in the commercial paper market by about $ 3 billion, causing the Federal Reserve to intervene by allowing commercial banks to borrow at discounted windows. This places a huge burden on clients from publishers who publish for Penn Central commercial paper, Goldman Sachs.
• On January 31, 1997, Mercury Finance, a major automotive lender, failed to pay debts of $ 17 million, rising to $ 315 million. The effect is small, partly because defaults occur during a strong economy.
• On September 15, 2008, Lehman Brothers caused two money funds to break the money, and led to Fed intervention in money market funds.

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See also

• Commercial paper supported by assets
• Negotiable tools
• Financial data vendors

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References

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External links

• "Commercial Paper Tariff and Outstanding Summary". Central government reserve system. May 5, 2017 . Retrieved June 1, 2017 .
Kennedy, Siobhan (August 22, 2007). "The bank gets a new beating because commercial paper is caught in a crisis". The Times . London . Retrieved June 1, 2017 . (Registration required ( help )) . Articles on commercial paper and vernacular credit markets.
• Hahn, Thomas K. (Spring 1993). "Commercial Paper" (PDF) . Quarterly Economy . Federal Reserve Bank of Richmond, VA . Retrieved June 1, 2017 . History of origin, and special rules governing the publication of commercial papers.
• Davidson, Adam; Blumberg, Alex (September 26, 2008). "The Week America's Economy Almost Died". All Things to Consider . National Public Radio . Retrieved June 1, 2017 .

Source of the article : Wikipedia