Commercial Paper (CP) is an “unsecured money market instrument issued in the form of a promissory note”. These are not usually backed by any form of collaterals and is allowed to be issued only by corporate with high quality debt ratings. Commercial Paper were introduced in India in 1990 with a view to enable high rated corporate borrowers to raise short term borrowers by this additional type of instrument which was till that at time was not available in India.
Commercial paper is usually issued by companies with very high credit ratings. Because of this, and because it generally matures in a very short period of time, commercial paper tends to be a very low-risk investment. Most commercial paper is assessed by more than one rating agency. The four primary agencies are: Moody’s, Standard & Poor’s, Fitch, and Duff & Phelps.
WHY IT MATTERS:
Commercial paper is issued by a wide variety of domestic and foreign firms, including financial companies, banks, and industrial firms.
Major investors in commercial paper include money market mutual funds and commercial bank trust departments. These large institutional investors often prefer the cost savings inherent in using commercial paper instead of traditional bank loans.
) It is quick and cost effective way of raising working capital.
2) Best way to the company to take the advantage of short term interest fluctuations in the market
3) It provides the exit option to the investors to quit the investment.
4) They are cheaper than a bank loan.
5) As commercial papers are required to be rated, good rating reduces the cost of capital for the company.
6) It is unsecured and thus does not create any liens on assets of the company.
7) It has a wide range of maturity
8) It is exempt from federal SEC and State securities registration requirements.
source:careerride.coma