What is a commercial paper? What are its advantages and limitations.
What is a commercial paper? What are its advantages and limitations.
Commercial paper is a credit instrument used by creditworthy firms to obtain short-term finance for their business. These are unsecured promissory notes, the maturity of which ranges from 90 to 364 days. They are generally issued to business firms, banks, insurance companies and pension funds, and their issue is regulated by the Reserve Bank of India.
Advantages of Commercial Paper
(a) The cost of issuing commercial paper is generally lower than cost of securing commercial bank loans.
(b) It a highly liquid asset as it can be transferred to anyone at any time.
(c) Companies can invest their surplus funds in commercial paper and earn good returns on their investment.
(d) They provide a continuous source of finance to firms, as the maturing funds can be repaid by issuing fresh commercial paper.
Limitation of Commercial Paper
(a) Since commercial paper denotes unsecured securities, they can only be used by firms that have a strong market position. Therefore, new firms cannot raise money by issuing commercial paper.
(b) The amount of money that can be raised through commercial paper is limited as it depends on the availability of funds with buyers at the time of its issue.
(c) The maturity period of commercial paper is fixed and ranges from 90 to 364 days. Therefore, if a firm is unable to redeem its commercial paper on time because of unavailability of funds, then it cannot extend the time period of the commercial paper.
Commercial paper is a credit instrument used by creditworthy firms to obtain short-term finance for their business. These are unsecured promissory notes, the maturity of which ranges from 90 to 364 days. They are generally issued to business firms, banks, insurance companies and pension funds, and their issue is regulated by the Reserve Bank of India.
Advantages of Commercial Paper
(a) The cost of issuing commercial paper is generally lower than cost of securing commercial bank loans.
(b) It a highly liquid asset as it can be transferred to anyone at any time.
(c) Companies can invest their surplus funds in commercial paper and earn good returns on their investment.
(d) They provide a continuous source of finance to firms, as the maturing funds can be repaid by issuing fresh commercial paper.
Limitation of Commercial Paper
(a) Since commercial paper denotes unsecured securities, they can only be used by firms that have a strong market position. Therefore, new firms cannot raise money by issuing commercial paper.
(b) The amount of money that can be raised through commercial paper is limited as it depends on the availability of funds with buyers at the time of its issue.
(c) The maturity period of commercial paper is fixed and ranges from 90 to 364 days. Therefore, if a firm is unable to redeem its commercial paper on time because of unavailability of funds, then it cannot extend the time period of the commercial paper.
