In the global money market commercial paper is a Unsecured debt promissory note with a fixed Maturity (finance) of 1 to 270 days. Commercial Paper is a money-market security (finance) issued (sold) by large bank and corporation to get money to meet short term debt obligations (for example, payroll , and is only backed by an issuing bank or corporations promise to pay the face amount on the maturity date specified on the note. Since it is not backed by Collateral (finance) only firms with excellent credit rating from a recognized Credit rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold at a discounts and allowances from face value, and carries higher interest repayment dates than Bond (finance) . Typically, the longer the maturity on a note, the higher the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically lower than banks rates.lt;/ref>

Overview

File:United States Commercial Paper 2001 to 2007 titles.svg File:United States Commercial Paper Weekly 2001 to 2008 titles small.svg As defined by Law of the United States commercial paper is a financial instrument that matures before nine months (270 days), and is only used to fund operating expenses or current assets (e.g., Inventory and accounts receivable and not used for financing fixed assets such as Land (economics) buildings or machinery lt;/ref> By meeting these qualifications it may be issued without Federal government of the United States regulation that is, it need not be Securities Act of 1933#The Registration Process with the U.S. Securities and Exchange Commission http://www.law.cornell.edu/uscode/html/uscode15/usc_sec_15_00000077---c000-.html 15 U.S.C. Section 77c(a)(3)] Commercial paper is a type of negotiable instrument where the Law Right and obligation of involved parties are governed by Articles Three and Four of the Uniform Commercial Code a set of non-federal Commercial law adopted by all 50 U.S. State except Louisiana.Ontario Securities Commission http://www.osc.gov.on.ca/Regulation/Rulemaking/Current/Part4/rule_20050708_45-106_ni-registration-exempt.pdf National Instrument 45-106] (Section 2.35) Accessed 2007-01-30 At the end of 2009, more than 1,700 companies in the United States issue commercial paper. As of 2008 October 31, the U.S. Federal Reserve reported seasonally adjusted figures for the end of 2007: there was $1.7807 Orders of magnitude (numbers)#1012 (Long and short scales or 1,780,700,000,000) in total outstanding commercial paper; $801.3 billion was Asset-backed commercial paper and $979.4 billion was not; $162.7 billion of the latter was issued by non-financial corporations, and $816.7 billion was issued by financial corporations.lt;!-- note that FRB updates its categorising and calculations at times and this changes the figures, and the FRB reports both seasonally adjusted and not seasonally adjusted figures, so the precise location of the figures quoted and the exact date of access is needed -->

History

Commercial paper, in the form of promissory notes issued by corporations, have existed since at least the 19th century. For instance, Marcus Goldman founder of Goldman Sachs got his start trading commercial paper in New York in 1869. http://query.nytimes.com/gst/abstract.html?res9F07EFD7123FE633A25750C2A96F9C946296D6CF Uhtermyer Urges Money Bill Changes; Approves Measure, but Wants Commercial Paper Defined in Its Strict Meaning] in The New York Times of September 23, 1913 http://query.nytimes.com/gst/abstract.html?res9B01E0DC1E39E633A25752C0A9659C946596D6CF Commercial Paper Should Be Changed; Gardin Thinks Three Years Sufficient for Transition to European Practice] in The New York Times of March 1, 1914

Issuance

There are two methods of issuing paper. The issuer can market the securities directly to a buy and hold investor such as most money market funds. 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 security (finance) firms and subsidiaries of bank holding companies. Most of these firms also are dealers in Treasury security 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.

Line of credit

Commercial paper is a lower cost alternative to a line of credit with a bank. Once a business becomes established, and builds a high credit rating, it is often cheaper to draw on a commercial paper than on a bank line of credit. Nevertheless, many companies still maintain bank lines of credit as a "backup". Banks often charge fees for the amount of the line of the credit that does nothave a balance. While these fees may seem like pure profit for banks, in some cases companies in serious trouble may not be able to repay the loan resulting in a loss for the banks.
Advantage of commercial paper: * High credit ratings fetch a lower cost of capital. * Wide range of maturity provide more flexibility. * It does not create any lien on asset of the company. * Tradability of Commercial Paper provides investors with exit options. Disadvantages of commercial paper: * Its usage is limited to only blue chip companies. * Issuances of Commercial Paper bring down the bank credit limits. * A high degree of control is exercised on issue of Commercial Paper. * Stand-by-credit may become necessary

Defaults

Default (finance) on high quality commercial paper are rare, and cause concern when they occur.lt;/ref> Notable examples include: * On June 21 1970, Penn Central defaulted on a debt of $77.1 million *:The Federal Reserve intervened and cut Penn Centrals bond rating from BBB to Bb.Ellis, Charles D. The Partnership: The Making of Goldman Sachs. Rev. ed. London: Penguin, 2009. 98. Print. This placed a substantial burden on clients of the issuing dealer for Penn Central’s commercial paper, Goldman Sachs. * On January 31, 1997, Mercury Finance, a major automotive lender, defaulted on a debt of $17 million, rising to $315 million. *:Effects were small, partly because default occurred during a robust economy. * On September 15, 2008, Bankruptcy of Lehman Brothers caused two money fund to break the buck and led to Fed intervention in money market funds.

See also

*Asset-backed commercial paper *Negotiable instrument

References

External links

*http://www.federalreserve.gov/Releases/cp/about.htm Federal Reserve System release on commercial papers] *http://legal-definitions.info/commercial-paper Commercial paper] - Encyclopedic entry *http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2302997.ece An article from The Times on commercial paper and credit market vernacular] *http://www.capitalmarketdaily.com CP Daily] - Premium provider of research and searchable databases relating to global CP and ECP markets. *Stepek, John. http://www.moneyweek.com/file/34286/whats-wrong-with-commercial-paper.html Whats wrong with commercial paper?] [[MoneyWeek]] August 31, 2007 - How the subprime crisis has affected the commercial paper market *http://www.mortgagenewsdaily.com/wiki/Asset_Backed_Commercial_Paper.asp What is Commercial Paper?] - Mortgage News Daily *http://www.richmondfed.org/publications/economic_research/instruments_of_the_money_market/ch09.cfm Fed Bank of Richmond, VA] - History of origin, and special regulations governing issue of commercial paper. Thomas K Hahn, Federal Reserve Bank of Richmond *http://www.npr.org/templates/story/story.php?storyId95099470 The Week Americas Economy Almost Died] NPR broadcast September 26, 2008. Category:Corporate finance Category:Commercial bonds ar:أوراق تجارية مالية de:Geldmarktpapier fr:Billet de trésorerie ko:기업어음 id:Surat berharga komersial it:Commercial paper ja:コマーシャルペーパー nl:Commercial paper pl:Papiery komercyjne przedsiębiorstw pt:Nota promissória ru:вексель sk:Cenný papier