Commercial paper

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Template:Infobox Midpage Need Sponsor Right Commercial paper consists of high-denomination, short-term unsecured debt instruments issued by corporations and traded directly on the money market without involving the SEC. Generally considered safe and low-yielding, the recent global credit crisis has significantly pushed up the price of cash for some commercial-paper issuers.

Easier money?[edit]

Commercial paper must mature within 270 days but averages around 30 days, and because it is usually offered at a discount to prevailing interest rate it's considered a cheaper alternative to bank financing. The U.S. Federal Reserve publishes one-month, two-month and three-month rates on AA financial and AA non-financial commercial-paper rates in weekly statistical releases.[1] Because commercial paper is usually not issued in denominations below $100,000, retail investors typically gain exposure indirectly though money-market funds or money-market deposit accounts.[2]

Latest news[edit]

The 2007-2008 credit crisis has even hit the commercial-paper market, long considered as good as cash for security and affordability. Volume on the market has declined in recent months while issuing corporations have been forced to pay much higher interest rates of up to six percent on short-term paper.[3] This trend is likely to force more businesses back to banks for credit-line financing of short-term obligations like accounts receivable and payrolls at a time of bank contractions.

On October 7, 2008, the Federal Reserve said it would step in and purchase three-month unsecured and asset-backed commercial paper directly from issuers. Traditionally, when the Fed lends to banks and other financial institutions, the loans are secured by collateral, but in this case, the Fed plans to collect up-front fees paid by issuers. The Treasury will make a special deposit at the Federal Reserve Bank of New York to support this facility. It is the first time the Fed has intervened in the commercial-paper market since the Depression.[4] The Fed released a statement that said, in part: "The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper, especially at longer-dated maturities."


References[edit]

  1. About Commercial Paper. U.S. Federal Reserve.
  2. Money Market: Commercial Paper. Investopedia - Forbes Digital.
  3. Banks Are Squeezed, Credit Is Crushed. Forbes.
  4. "Not Yet the Last Resort". The Economist.