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Commercial paper is available in a variety of denominations and usually ranges in maturity from 2 to 270 days.
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A firm customarily buys its supplies and materials on credit from other firms, recording the debt as an account payable.
This helps enrich the market structures of interest rates and risks and liquidity, and generates a market yield curve that covers short-, mid- and long-term financial products.
More flexible than short-term bonds, and more competitive and market-oriented than bank liquidity loans, Super & short-term commercial paper is designed for enterprises to overcome a shortage of short-term working funds and improve liquidity management.
A single loan obtained from a bank by a business firm is not different in principle from a loan obtained by an individual. Repayment is made in a lump sum at maturity or in installments throughout the life of the loan.
A Commercial paper, a third source of short-term credit, consists of well-established firms’ promissory notes sold primarily to other businesses, insurance companies, pension funds, and banks.The cost of not taking cash discounts is the price of the credit.Commercial bank lending appears on the balance sheet as notes payable and is second in importance to trade credit as a source of short-term financing.They are better suited for large enterprise groups that implement financial management.Currently, the qualified issuers of super & short-term commercial paper include AAA central enterprises and their core subsidiaries with assets and revenues accounting for over half of their respective groups’ total size.Commercial paper is usually issued by companies with high credit ratings, meaning that the investment is almost always relatively low risk.A SCP is defined as a bond with a term of 270 days (9 months) or shorter that is issued in the inter-bank bond market by a non-financial corporation that has enterprise capacity and a high credit rating, usually AAA.This trade credit, as it is commonly called, is the largest single category of short-term credit.Credit terms are usually expressed with a discount for prompt payment.A basic limitation of the commercial-paper market is that its resources are limited to the excess liquidity that corporations, the main suppliers of funds, may have at any particular time.Another disadvantage is the impersonality of the dealings; a bank is much more likely to help a good customer weather a storm than is a commercial-paper dealer.