Saturday, May 9, 2009

commercial paper

commercial paper is a from of direct short-term finance by large,creditworthy company such as A&t needs immediate funds,it can sell commercial paper(a debt instrument)to another corporation or financial institution. Commercial paper is a promise to pay back a higher specified amount at a designated time in the immediate future---say,30days. By issuing commercial paper,a corporation avoids the process of applying for a loan and instead engages in direct finance. To engage in direct finance effectively,the issuing company must be large and creditworthy enough to find someone willing to accept its commercial paper,which is sold with the aid of brokers.the use of commercial paper grew from $50 billion in 1976 to $339 billion in 1992,an increase of about 12.7 percent per year. The growing use of commercial paper has increased the competitive pressure on banks,which are finding some of their potential loan customers turning to the commercial paper market.

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