Question

Commercial paper is supposed to be low risk. Our financial system depends on companies being willing to lend one another funds to cover short-term deficits.

Commercial paper is a specialized form of extremely low-risk, short-term bonds—basically a form of an I.O.U. People like Balika, bond traders, arrange the transfer of money from the flush to the temporarily needy. When ServiceMaster needs some money, it calls a bond trader and offers to sell an I.O.U. to another company that has some extra cash. Then, when ServiceMaster is flush again, it can buy back that I.O.U. and give some of its extra cash to a firm that needs money. (It is a bit confusing that the borrower sells a bond and the lender buys one.) In normal times, this process happens as fast as it takes a broker to hit a few computer keys.

In September 2008, lots of companies wanted to sell bonds—they needed cash quickly—but virtually none were willing to buy them, fearful that the bonds would be worth nothing the next day.

If you were a company executive during September 2008 tasked with covering the short-term financial needs of your company,

what would your solution have been? What if you were (on the other end) with excess funds that you would normally lend to a company facing a short-term deficit?

Would you have made that loan?

What ethical considerations would there be on both sides?

Please do not copy and paste previous answers to the same question, use your own, if you can't use your own point of view don't answer it.

Answer 1

COMMERCIAL PAPER: It is short term unsecured promisssory notesissued by the companies. It is money-market security issued by the large corporation to obtain funds to meet short term debt obligation and it is backed only by the issuing banks or the companies promise to pay the face amount on the maturity date specified on the note.

It is typically issued for the financing of payroll, accounts payable, inventories, and meeting other short term liabilities. This short term instrument can be a viable alternative for retail fixed-income investor who are looking for a better return on their money.

KEY POINTS must be taken into consideration for commercial paper:

- it is common form of unsecured, short-term debt issued by a corporation

- Maturities on most the commercial paper ranges from a few weeks to month.

- It is typically issued for the financing of payroll, accounts payable, invertories, and meeting other short term liabilities of the company.

- It is usually issued at a discount from face value and reflects prevailing market interest rates.

IN september 2008, lots of companies wanted to sell bonds for cash quickly but due to the bonds worth nothing on the next day. A crucial analysis and understanding of the concept.

- COMMERCIAL paper pays a fixed rate of interest as it is unsecured form of promissory notes.

- As argu that commercial paper pays a higher rate of interest than the guarantee instruments, and the rates tend to rise along with the national economic growth.

CONSIDERATIONS TO BE TAKEN INTO ACCOUNT:

- BY Issuing commercial paper , the credit available from the banks get reduced.

- RBI is closely regulated

- Maturity period is from 30 days to 270 days, where as more commercial paper have 30 days life

- only financially secure and highly rated organization can raise money through commmercial papers.

DECISION: IT is an old method of financing, so if the firm is not in a position to redeem its paper due to the financial difficulties, extension is not posible.