What is commercial paper?what are its …

• Commercial paper is a short-term unsecured money market instruments introduced in India in 1990.
• Also a promissory note which is negotiable and transferable.
• Have a maturity period ranging from a minimum of 15 days to a maximum of one year.
• Primarily used by large and creditworthy companies for bridge financing i.e. used as an alternative to borrowings from bank and capital market.
• The companies pay an interest rate lower than the market rates and are used for purposes such as to meet the floatation cost on long-term borrowings from the capital market.

Advantages

• It is more liquefiable and free to transfer.
• It provided more funds rather than any other source.
• No restrictive condition as it is unsecured money market instrument
• The cost involved in issuing commercial paper for a firm is lower than the cost the commercial bank loans.
• It is a continuous source of funds as their maturity can be adjusted according to the firm the one who issued the commercial paper.

Disadvantages

• The firm one who has good financial background can issue commercial paper as it is based on unsecured money market.
• Only limited fund can be raised through commercial paper.
• Maturity period cannot be extended at times of firm’s financial problem.