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    Commercial Papers (CPS) : Considerable Financial Strength Are Authorized To Issue The Instrument

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    Gilner Pomar
    Commercial papers are short-term unsecured money market instruments issued by large corporations as promissory notes to raise short-term funds for working capital needs. They have maturities between 30 to 270 days and are sold at a discount but redeemed at par value. Only companies with high credit ratings from agencies like Moody's, S&P, and Fitch are eligible to issue commercial papers at reasonable prices due to the unsecured nature of the instrument.

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    Commercial Papers (CPS) : Considerable Financial Strength Are Authorized To Issue The Instrument

    Uploaded by

    Gilner Pomar
    34 views4 pages
    Commercial papers are short-term unsecured money market instruments issued by large corporations as promissory notes to raise short-term funds for working capital needs. They have maturities between 30 to 270 days and are sold at a discount but redeemed at par value. Only companies with high credit ratings from agencies like Moody's, S&P, and Fitch are eligible to issue commercial papers at reasonable prices due to the unsecured nature of the instrument.

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    Commercial Papers

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    Commercial papers are short-term unsecured money market instruments issued by large corporations as promissory notes to raise short-term funds for working capital needs. They have maturities between 30 to 270 days and are sold at a discount but redeemed at par value. Only companies with high credit ratings from agencies like Moody's, S&P, and Fitch are eligible to issue commercial papers at reasonable prices due to the unsecured nature of the instrument.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    34 views4 pages

    Commercial Papers (CPS) : Considerable Financial Strength Are Authorized To Issue The Instrument

    Uploaded by

    Gilner Pomar
    Commercial papers are short-term unsecured money market instruments issued by large corporations as promissory notes to raise short-term funds for working capital needs. They have maturities between 30 to 270 days and are sold at a discount but redeemed at par value. Only companies with high credit ratings from agencies like Moody's, S&P, and Fitch are eligible to issue commercial papers at reasonable prices due to the unsecured nature of the instrument.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    COMMERCIAL PAPERS (CPs)

    Short-term, unsecured money market instrument, issued as a promissory


    note by big corporations having excellent credit ratings.
    As the instrument is not backed by collateral, only large firms with
    considerable financial strength are authorized to issue the instrument.
    Features of Commercial Paper
    The maturity period of commercial paper lies between 30 to 270 days.
    It is sold at a discount but redeemed at its par value.
    There is no well-developed secondary market for commercial paper; rather
    they are placed with existing investors who intend to hold it till it gets
    matured.
    The primary purpose of issuing commercial paper is to raise short-term
    funds so as to meet working capital requirements of the firm. Working
    capital is the money used to cover all of a company's short-term expenses,
    including inventory, payments on short-term debt, and day-to-day expenses
    called operating expenses. However, firms also raise money through CP’s to
    fill the gap between fund required currently and long term funds raised from
    the market.
    Since, the instrument is unsecured, if the company fails to pay the amount
    due, the buyers of the instrument, have no claim on the company’s assets.
    And due to this, only companies with high credit ratings are eligible to sell
    their commercial paper at reasonable prices. Further, due to the shorter
    maturity period, the rate of return is relatively low.
    Credit Rating
    A credit rating is an opinion of a particular credit agency regarding the
    ability and willingness an entity (government, business, or individual) to
    fulfill its financial obligations in completeness and within the established
    due dates. A credit rating also signifies the likelihood a debtor will default.
    A credit agency evaluates the credit rating of a debtor by analyzing the
    qualitative and quantitative attributes of the entity in question. The
    information may be sourced from internal information provided by the
    entity, such as audited financial statements, annual reports, as well as
    external information such as analyst reports, published news articles,
    overall industry analysis, and projections.
    There are three prominent credit agencies that control 85% of the overall
    ratings market:
    Moody’s Investor Services
    Standard and Poor’s (S&P)
    Fitch Group
    Each agency uses unique, but strikingly similar, rating styles to indicate
    credit ratings.
    APPLICATIONS:
    1. Super Acme Corporation purchases a P625,000.00 CPs due in 60days
    at 5.4%. What is the discount (D) and what is the cost (C)?
    Solution:
    T = total future value
    DR = discount rate
    N = number of days to maturity
    FV = future value
    D = T (DR / 100) (N / 360)
    D = 625,000.00 (0.054 / 100) (60 / 360)
    D = 625,000.00 (.00054) (0.16667)
    D = P56.25   This is the discount
     
    C=T–D
      = 625,000.00 – 56.25
      = P624,943.75  This is the cost of the CP
     
    2. Polo, Inc. purchases CPs worth P21,750,000.00 in 180 days at 4.25%.
    What is the discount and what is the cost?
    D = (21,750,000.00) (0.0425 / 100) (180 /360)
      = (21,750,000.00) (0.000425) (0.5)
      = P4,621.88
    C = T –D
      = 21,750,000.00 – 4,621.88
      = P21,745,378.12
     
    3. Calculating the Yield of CP
    Formula: Yield = (FV – SP) / (SP) * (360 / M) * (100)
    Where: FV – Face Value, SP – Sale Price, M – maturity
    Calculate the yield of the following CP:
    FV = P500,000.00
    SP = P490,000.00
    M = 100
    Brokerage Fee = 3%
    Solution:
    Brokerage Fee = (FV) (Brokerage Fee)
                    = (P500,000.00) (0.03)
                    = P15,000.00
    Net SP = SP – Brokerage Fee
            = P490,000.00 – P15,000.00
            = P475,000.00
    Yield = (500,000.00 – 475,000.00 / 475,000.00) * (360 /100) * (100)
          = (25,000.00 / 475,000.00) * (3.6) * (100)
          = (0.05263) (3.6) (100)
          = 18.9468
          = 18.95%
    Indication: 18.95% expressed as an annual percentage rate based on
    the CP’s cost and is the income returned on the investment of a CP.
    The yield for commercial paper holders is the annualized
    percentage difference between the price paid for the paper and the
    face value using a 360-day year.

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