what is the difference between bank loans and commercial paper? are there specific situations when companies...

what is the difference between bank loans and commercial paper? are there specific situations when companies should resort to using commercial paper?

Expert Solution

Lending of money is a loan. So, when a bank id lending money, it is termed as bank loan. It can lend money to another banks, government and provate companies, individuals etc. Banks earns interest on these loans along with principal amount. These can be of short duration (Less than 1 year) or long duration ( more than 1 year).

Commercial paper: It is a kind of debt instrument used to raise company is exchnge of paying interest as well principal amount to meet short term obligations like payrolls, new project financing etc. Entity issuing commmercial paper can be private banks, private companies etc. These are generally of short duration ( less than 1 year ).

The latter provides an easy financing method because it allows issuers to skip the complex process of applying for and securing loans, and since it is traded in the money market, Securities and Exchange Commission (SEC) does not require it to be registered. It is generally offered at discounted rates.

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