Tuesday, August 25, 2009

Types of commercial paper(1)

There are two major types of commercial paper-direct paper and dealer paper.
The main issuers of direct paper are large finance companies and bank holding companies, who deal directly with the investor rather tan using a securities dealer as an intermediary. These companies, which regularly extend installment credit to consumer and large working-capital loans and leases to businesses firm, announce the rates they are currently paying for various maturities. Investors then select those maturities which most closely approximate their expected holding periods and buy the securities directly from issuer.
Leading finance-company borrowers in the direct paper market include General Motors Acceptance Corporation, CIT Financial Corporation, commercial credit corporation, and general electric credit corporation. The lending bank holding companies which issue commercial paper are centered around the largest banks in New York, Chicago, San Francisco, and other major U.S. Cities. Today, about 80 financially oriented U.S. companies' account for nearly all the directly placed paper, with finance companies issuing approximately three fourths of the total. All of these firms have an ongoing need for huge amounts of short-term money; posses top credit ratings, and have established working relationship with major institutional investors in order to rapidly place their new note issues.

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