Who is commercial paper issued by

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Market Classroom. Stock Watch. Market Calendar. Stock Price Quotes. Commercial paper is not usually backed by any form of collateral , making it a form of unsecured debt. It differs from asset-backed commercial paper ABCP , a class of debt instrument backed by assets selected by the issuer. In either case, commercial paper is only issued by firms with high-quality debt ratings.

Only these kinds of firms will be able to easily find buyers without having to offer a substantial discount higher cost for the debt issue. Other corporations, financial institutions, wealthy individuals, and money market funds are usually buyers of commercial paper.

Marcus Goldman of Goldman Sachs was the first dealer in the money market to purchase commercial paper, and his company became one of the biggest commercial paper dealers in America following the Civil War.

A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission SEC as long as it matures before nine months, or days, making it a very cost-effective means of financing.

Although maturities can go as long as days before coming under the purview of the SEC, maturities for commercial paper average about 30 days, rarely reaching that threshold.

The commercial paper market played a big role in the financial crisis that began in As investors began to doubt the financial health and liquidity of firms such as Lehman Brothers , the commercial paper market froze, and firms were no longer able to access easy and affordable funding. Another effect of the commercial paper market freezing was some money market funds—substantial investors in commercial paper—"breaking the buck.

An example of commercial paper is when a retail firm is looking for short-term funding to finance some new inventory for an upcoming holiday season. This interest rate can be adjusted for time, contingent on the number of days the commercial paper is outstanding.

Federal Reserve Bank of Richmond. Accessed Feb. Goldman Sachs. Board of Governors of the Federal Reserve System. Federal Reserve. Mutual Fund Essentials. CDOs and SIVs , for instance, use commercial paper to finance the purchase of mortgage-backed securities MBSs , profiting from the difference of receiving the higher yield of MBS securities, and paying the lower yield of commercial paper. As an example of bridge financing, a corporation may project that interest rates will be lower in the future, but, for business reasons, may want to finance a project immediately.

It can finance the project immediately by issuing commercial paper with a maturity that coincides with the projected lower interest rates. Then it can issue long-term bonds, and use the proceeds to pay for the redemption of the commercial paper. Issuers can be divided into financial and nonfinancial companies, although most issuers are financial.

There are 3 types of finance companies:. Captive finance companies are subsidiaries of manufacturers, with the purpose of providing financing for the manufacturer. Other vehicle manufacturers also have captive finance companies to promote the sale of their vehicles.

Bank holding companies general use finance companies to cater to customers with weaker credit. Independent finance companies are not affiliated with any other company or bank—hence, the name.

Generally, only corporations with the highest credit rating can issue commercial paper. Some companies with weaker credit can get credit enhancements , so that they can issue commercial paper.

Asset-backed commercial paper is backed by high quality collateral. Credit-supported commercial paper is often guaranteed by an organization with excellent credit, such as a bank. Often, a letter of credit is used for this purpose, which is referred to as LOC paper. The bank promises to pay the face value of the paper if the issuer doesn't. Other costs that the issuer must pay are agents' fees to a bank for doing the paperwork necessary to issue commercial paper, and thousands of dollars to have the issue rated by a credit rating organization, such as Standard and Poor's and Moody's.

In fact, a large default can actually scare the entire commercial paper market. Many commercial paper issuers purchase insurance as a form of backup. Defaults are more common than in past years. Prior to the financial crisis of , commercial paper issuers in the U. That number rose sharply in One famous example of commercial paper default took place in when the transportation giant Penn Central declared bankruptcy. The company defaulted on all of its commercial paper obligations.

The immediate consequence was that its creditors lost their money. There was so much Penn Central commercial paper floating around that the entire commercial paper market took a hit. Issuers who had no relation to Penn Central saw investors lose confidence in the instrument altogether. After this debacle, the practice of buying backup loan commitments as a form of insurance for commercial paper became commonplace in the market. It is possible for small retail investors to purchase commercial paper, although there are several restrictions that make it more difficult.

Most commercial paper is sold and resold to institutional investors , such as large financial institutions, hedge funds, and multinational corporations. A retail investor would need access to very large amounts of capital to buy and own commercial paper; otherwise, indirect investment is possible through mutual funds, exchange-traded funds ETFs or a money market account administered and held at a depository institution.

Factors such as regulatory costs, the scale of investable capital, and physical access to the capital markets can make it very difficult for an individual or retail investors to buy and own commercial paper.

This threshold in itself makes buying commercial paper generally exclusive to institutional investors and wealthy individuals. Further, broker-dealers issuing commercial paper on behalf of a client have pre-existing relationships with institutional buyers that make the market efficient through large purchases of primary offerings.

They would not be likely to look to individual investors as a source of capital to fund the transaction. The Federal Reserve Board posts the current rates being paid by commercial paper on its website. Figures for each outstanding commercial paper issue are also available at the close of business every Wednesday and on the last business day of every month.

Commercial paper is becoming increasingly available to retail investors from many outlets. Those who seek higher yields will likely find these instruments appealing due to their superior returns with modest risk. For more information on commercial paper, contact your financial advisor or visit the Federal Reserve Board website.

Accessed Dec. Board of Governors of the Federal Reserve System. Money Market Account. Investing Essentials. Alternative Investments.