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Commercial paper



Commercial Paper COMMERCIAL PAPER Peter A. Abken Commercial paper is a short-term unsecured prom- issory note that is generally sold by large corpora- tions on a discount basis to institutional investors and to other corporations. Since commercial paper is unsecured and bears only the name of the issuer, the market has generally been dominated by large cor- porations with the highest credit ratings. In recent years commercial paper has attracted much attention because of its rapid growth and its use as an alter- native to short-term bank loans. The number of firms issuing commercial paper rose from slightly over 300 in 1965 to about 1,000 in 1980. Moreover, the outstanding volume of commercial paper in- creased at an annual rate of 12.4 percent during the 1970s to a level of $123 billion in June 1980. This article describes the commercial paper market, focus- ing primarily on the 1970s, the period of greatest change and growth. Market Characteristics The principal issuers of commercial paper include finance companies, nonfi- nancial companies, and bank holding companies. These issuers participate in the market for different reasons and in’ different ways. Finance companies raise funds on a more-or-less continuous basis in the commercial paper market to support their consumer and business lending. These commercial paper sales in part provide interim financing between issues of long-term debentures. Nonfinancial companies issue commercial paper at less frequent intervals than do finance companies. These firms issue paper to meet their funding requirements for short-term or sea- sonal expenditures such as inventories, payrolls, and tax liabilities. Bank holding companies use the com- mercial paper market to finance primarily banking- related activities such as leasing, mortgage banking, and consumer finance. Denominations and Maturities Like other instru- ments of the money market, commercial paper is sold to raise lar

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