Question

How does “direct” commercial paper differ from “dealer” commercial paper? Which one would likely be more expensive for a company to issue? Explain your answer.

Answer 1

Commercial paper refers to unsecured debt raised by organizations to meet their working capital requirements.They are unsecured and therefore not backed by any assets.Most commercial papers have a maturity of $100,000.The commercial papers have a maturity of 270 days.Initially commercial papers were sold through dealers that acted as an intermediary.But the direct issue of commercial paper is relatively less expensive.In the case of direct commercial paper the debt is raised often by large financial institutions by issuing it directly to the investor.These firms will have regular requirement of large amount of funds. By removing the intermediary the companies can save on the fees charged by the intermediary(which is roughly 5 basis points). In the case of a dealer commercial paper the company will raise he debt through an intermediary.When the issue is made through the dealer the company will have to bear the fees charged by the dealer.Companies that resort to raising funds through dealer commercial paper are typically non finance companies.