Important Banking Awareness Notes on Commercial Paper for IBPS PO/Clerk/RRB 2016 – Download in PDF:
Dear Readers, Here we have given the important Banking Awareness Notes on Commercial Paper which will be more useful for the candidates those who are preparing for the upcoming IBPS PO/Clerk RRB 2016 Exams. Candidates also can download this in PDF.
Definition of Commercial Paper:
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.It was introduced in India in 1990with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors.
The Commercial Papers has become effective instrument for corporate companies to avail the short-term funds from the money market within shortest possible time limit by avoiding the hassles of direct negotiation with the commercial banks for availing the short-term loans.
Features of Commercial Paper:
a)A Commercial Paper is a monetary instrument issued in the form of Promissory Note.
b)These are the unsecured instruments as they are not backed by any assets of the company which is issuing.
c)These can be sold either directly by the issuing company to the investors or else issuer can sell it to the dealer who in turn will sell it into the market.
d)It helps the highly rated company in the sense they can get cheaper funds from commercial paper rather than borrowing from the banks.
e) They are negotiable by endorsement and delivery and hence they are flexible as well as liquid instruments. Commercial paper can be issued with varying maturities as required by the issuing company.
Eligibility to issue Commercial Papers
Corporate, Primary Dealers and All India Financial Institutions are eligible to issue CP. To be eligible to issue Commercial Paper, the Corporate need to have a tangible net worth of minimum Rs. 4 Crore. Further,
a)the company must have been sanctioned working capital limit by banks or all-India financial institutions
b)The borrower account of the company should be high rated i.e. it should be classified as Standard Asset by the Financial Institutions.
Denominations and Maturity of Commercial Paper
Maturity of Commercial Paper is minimum of 7 days and a maximum of up to one year from the date of issue. CP can be issued in denominations of Rs.5 lakh or multiples thereof.
Who can invest in Commercial Paper?
c)Other corporate bodies registered/incorporated in India
e)Non-resident Indians (NRIs)
f) Foreign institutional investors (FIIs) within overall limit set by SEBI
What is return on CP?
CP is issued at a discount to face value as may be determined by the issuer. The difference between issue price and face value is return. Further, CPs are traded in the OTC markets.
What is the Maturity period of CP?
CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue. However,the maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid.
What are the advantages of CP?
a) It is quick and cost effective way of raising working capital
b) CP’s are cheaper than Bank Loan
c) As CP’s are required to be rated, Good Rating reduces the cost of capital for the company
d) It is Unsecured and thus does not create any liens on the assets of the company
e) It has a wide range of maturity, ranging from 7 days to 1 year
What are the dis-advantages of CP’s?
a) It is available only to a few selected and Profitable Companies.
b) CP can normally be retried only at the end of the term, whereas the bank loan can be retried any time
c) By issuing commercial, the credit available from the banks may get reduced
QUICK REVISION QUESTIONS:
1. Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It can be issued by ________.
A. Central and State Governments
B. Financial Institutions
C. Corporate Companies
D. Local Municipal Bodies
a) Only A and B
b) Only A and C
c) Only B and C
d) Only C and D
e) Only A, B and C
2. A Commercial Paper can issue for minimum ______ and upto maximum _______.
a) 7 days to 1 year
b) 7 days to 2 years
c) 7 days to 3 years
d) 7 days to 4 years
e) 7 days to 5 years
3. CP can be issued in denominations of
a) 1 lakh
b) 2 lakhs
c) 5 lakhs
d) 8 lakhs
e) 12 lakhs
4. Commercial Paper was introduced in India in 1990. It is a ______ money market instrument issued as an unsecured promissory note.
a) Shot – Term
b) Mid – Term
c) Long – Term
d) None of the above
e) All the above
5. Commercial Paper is an unsecured money market instrument issued in the form of _______
a) Bill of Exchange
b) Share Certificate
c) Debenture Certificate
d) Promissory Note
e) Preferential Share Certificate