Dsds Essay

9144 Words Nov 24th, 2012 37 Pages
Commercial Paper
Thomas K. Hahn

C

ommercial paper is a short-term unsecured promissory note issued by corporations and foreign governments. For many large, creditworthy issuers, commercial paper is a low-cost alternative to bank loans. Issuers are able to efficiently raise large amounts of funds quickly and without expensive Securities and Exchange Commission (SEC) registration by selling paper, either directly or through independent dealers, to a large and varied pool of institutional buyers. Investors in commercial paper earn competitive, market-determined yields in notes whose maturity and amounts can be tailored to their specific needs.
Because of the advantages of commercial paper for both investors and
issuers,
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Federal Reserve Bank of Richmond Economic Quarterly Volume 79/2 Spring 1993

45

46

Federal Reserve Bank of Richmond Economic Quarterly

$ Billions

Figure 1 Commercial Paper Outstanding

Source: Board of Governors of the Federal Reserve System.

1. CHARACTERISTICS OF COMMERCIAL PAPER
The Securities Act of 1933 requires that securities offered to the public be registered with the Securities and Exchange Commission. Registration requires extensive public disclosure, including issuing a prospectus on the offering, and is a time-consuming and expensive process.1 Most commercial paper is issued under Section 3(a)(3) of the 1933 Act which exempts from registration requirements short-term securities as long as they have certain characteristics.2
The exemption requirements have been a factor shaping the characteristics of the commercial paper market.
1 Registration

for short-term securities is especially expensive because the registration fee is a percent of the face amount at each offering. Thirty-day registered notes, rolled over monthly for one year, would cost 12 times as much as a one-time issuance of an equal amount of one-year notes. 2 Some commercial paper is issued under one of the two other exemptions to the Securities
Act. Commercial paper which is guaranteed by a bank through a letter of credit is exempt under
Section 3(a)(2) regardless of whether or not the issue is also exempt under Section 3(a)(3). Commercial paper sold

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