Commercial Paper As A Source Of Short-Term Financing

Lacking such a market, their value is based on models that are sensitive to a number of assumptions.- In addition, other variations of CP have been introduced in the market in recent years, including extended liquidity notes (also called extendible or structured notes) in which the maturity of the notes may extend beyond their original maturity date in the case of a default.

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Banks provide three kinds of loans – Single, End-of-period Payment Loan (firms pay fixed or variable interest on the loan and payback the principal sum in lump sum at the end of the loan); lines of credit (a bank agrees to lend a company any amount up to a stated maximum – it may be committed or uncommitted line of credit.

In India the line of credit is usually in the form of cash credit and banks charge interest only on the actual balance utilized; and floating charge is created in favor of the bank); and bridge loans (to bridge the gap until a firm can arrange for long-term financing – the lender deducts interest in the beginning from the loan proceeds).

Important sources of short term financial planning are as follows: First of all short-term financial planning must make a forecast of future cash flows.

It has two objectives – first, to decide whether the company will have surplus cash or cash deficit; and second, whether it is of temporary or permanent nature.

With ABCP, certain assets such as credit card receivables or auto loans and their cash flows, support a specific CP issue.

ABCP is usually sold through a conduit, a special purpose vehicle (SPV) established to facilitate the financing. Some SPVs pool the assets of many entities from various industries.If the loan amount is too large for a single bank, the loans may be arranged by one or more lead banks from a syndicate of banks, known as syndicated loans.It is a short-term, unsecured debt used by large companies, and is cheaper than a short-term bank loan.Some SIVs take advantage of spread differentials in fixed income securities, earning interest rate arbitrage profits.SIVs may invest in various asset categories, some of which are difficult to value because they do not trade on any active market.These multiseller ABCP programs issue CP backed by the cash flows from all the underlying assets.The goal of such multiseller Programs is to enjoy the diversification from multiple sellers of various industries.Commercial paper (CP) is a short-term, unsecured promissory note issued by corporations typically used as a source of working capital, receivables financing, and other short-term financing needs. Originally the CP market was available as a funding source to only the highest credit quality entities.CP has maturities ranging anywhere from 1 to 270 days. However, innovations such as liquidity programs, credit enhancements, and various special legal structures have made CP a viable financing alternative for entities with lower credit ratings.Single seller ABCP programs are backed by the assets of one entity, for example a corporation.Consequently, they lack the diversification of multi-seller programs.