Wt do u mean by commercial papers?

Question

Answer

Commercial paper is an unsecured promissory note issued by a firm to raise funds for a short period, varying from 90 days to 365 days. Its regulation comes under the purview of Reserve Bank of India.

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It is a short term unsecured promissory note issued by large credit worthy companies to raise short term funds at lower rate of interests than market rates. They are negotiable instruments transferable by endorsement and delivery with a fixed maturity period of 15 days to 1 year.

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It is a negotiable instrument issued for 3 to 12 months

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Ok thnku u all

Answer

Commercial Papers:

Commercial papers (CPs) are unsecured short-term debt instruments issued by corporations, financial institutions, and other eligible entities to raise funds to meet their short-term liquidity requirements. They serve as an alternative source of financing to traditional bank loans and are typically issued for a period ranging from a few days to a year. CPs are commonly used by large and creditworthy companies to fund their working capital needs, such as inventory purchases, accounts payable, and other operational expenses.

Features of Commercial Papers:
- Tenor: Commercial papers have a fixed maturity period, typically ranging from 1 day to 1 year. However, the most common tenors are 30, 60, and 90 days.
- Issuer: Eligible entities that can issue commercial papers include public and private companies, financial institutions, and statutory corporations.
- Unsecured: Commercial papers are unsecured instruments, meaning they do not have any collateral backing. The repayment is solely based on the creditworthiness of the issuer.
- Denomination: They are usually issued in large denominations such as Rs. 5 lakh and its multiples. However, with the introduction of the 'Trade Receivables Discounting System' (TReDS), CPs can now be issued in smaller denominations as well.
- Secondary Market: Commercial papers can be traded in the secondary market before their maturity, providing investors with liquidity. This secondary market allows investors to buy and sell CPs at prevailing market rates.
- Rating: Credit rating agencies assess the creditworthiness of commercial paper issuers and assign ratings based on their evaluation. Higher ratings indicate lower credit risk.

Benefits of Commercial Papers:
- Lower Cost: Companies can often obtain funds at a lower cost compared to traditional bank loans.
- Flexibility: CPs offer flexibility in terms of maturity, allowing issuers to match their funding needs with the appropriate tenor.
- Diversification: Investors can diversify their portfolios by investing in commercial papers issued by various companies and sectors.
- Liquidity: The secondary market for commercial papers provides investors with an avenue to exit their investments before maturity if needed.

Regulation:
Commercial papers in India are regulated by the Reserve Bank of India (RBI) and governed by the provisions of the Companies Act, 2013. The RBI sets guidelines regarding the issuance and trading of CPs, including eligibility criteria for issuers, minimum credit ratings, and disclosure requirements.

In conclusion, commercial papers are short-term debt instruments that offer companies a means to raise funds for their working capital needs. They provide issuers with a cost-effective and flexible financing option while offering investors an opportunity to invest in highly rated, short-term instruments.

Answer

Thanks

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