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    Commercial Paper

    Uploaded by

    Karen Laccay
    Commercial paper is a short-term, unsecured promissory note issued by firms to finance accounts receivable, inventories, and short-term liabilities. Most commercial paper matures within 270 days to avoid needing SEC registration. Commercial paper is sold at a discount from its face value, with the interest rate determined by the discount and maturity period. Interest rates on commercial paper are typically 2-4% below prime rates but must be lower than bank loan rates. The example shows a company issuing $1 million commercial paper at $990,000 that yields an effective annual interest rate of 4.16% when rolled over throughout the year.

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    Commercial Paper

    Uploaded by

    Karen Laccay
    346 views2 pages
    Commercial paper is a short-term, unsecured promissory note issued by firms to finance accounts receivable, inventories, and short-term liabilities. Most commercial paper matures within 270 days to avoid needing SEC registration. Commercial paper is sold at a discount from its face value, with the interest rate determined by the discount and maturity period. Interest rates on commercial paper are typically 2-4% below prime rates but must be lower than bank loan rates. The example shows a company issuing $1 million commercial paper at $990,000 that yields an effective annual interest rate of 4.16% when rolled over throughout the year.

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    Commercial paper is a short-term, unsecured promissory note issued by firms to finance accounts receivable, inventories, and short-term liabilities. Most commercial paper matures within 270 days to avoid needing SEC registration. Commercial paper is sold at a discount from its face value, with the interest rate determined by the discount and maturity period. Interest rates on commercial paper are typically 2-4% below prime rates but must be lower than bank loan rates. The example shows a company issuing $1 million commercial paper at $990,000 that yields an effective annual interest rate of 4.16% when rolled over throughout the year.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    346 views2 pages

    Commercial Paper

    Uploaded by

    Karen Laccay
    Commercial paper is a short-term, unsecured promissory note issued by firms to finance accounts receivable, inventories, and short-term liabilities. Most commercial paper matures within 270 days to avoid needing SEC registration. Commercial paper is sold at a discount from its face value, with the interest rate determined by the discount and maturity period. Interest rates on commercial paper are typically 2-4% below prime rates but must be lower than bank loan rates. The example shows a company issuing $1 million commercial paper at $990,000 that yields an effective annual interest rate of 4.16% when rolled over throughout the year.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    COMMERCIAL PAPER

    A form of financing consisting of short-term, unsecured promissory notes


    issued by firms with a high credit standing.
    Typically used for the financing of accounts receivable, inventories and
    meeting short-term liabilities.
    Most commercial paper issues have maturities ranging from 3 to 270 days.
    Generally issued in multiples of $100,000 or more.
    Major benefit: it does not need to be registered with SEC as long as it matures
    before 270 days.

    INTEREST ON COMMERCIAL PAPER

    Commercial paper is sold at a discount from its par or face value.


    The size of the discount and the length of time to maturity determine the
    interest paid by the issuer of commercial paper.
    The interest cost is normally 2% to 4% below the prime rate but the overall
    cost of commercial paper may not be less than that of a bank loan.

    Formula:

    i=

    FACE VALUE AMOUNT PAID


    AMOUNT PAID

    i
    1+

    Effective Annual Rate=


    Where:
    i= interest rate
    n= maturity period

    ibey
    EAR 1

    365 / h

    365/ h

    Example:
    Bertram Corporation, a large shipbuilder, has just issued $1 million worth of
    commercial paper that has a 90-day maturity and sells for $990,000. At the end of
    90 days, the purchaser of this paper will receive $1 million for its $990,000
    investment. The interest paid on the financing is therefore $10,000 on a principal of
    $990,000. The effective 90-day rate on the paper is 1.01% ($10,000/$990,000).
    Assuming that the paper is rolled over each 90-days throughout the year (that is
    365/90 = 4.06 times per year), the effective annual rate for Bertrams commercial
    paper is 4.16% [(1+0.0101)4.06-1].

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