Financial Markets and Institutions (2-downloads)

Negotiable

Certificates

of Deposit

Treasury Bills

2003 2004 2005 2006 2007 2008 2009 2010

F I G U R E   1 1 . 4

Interest Rates on Negotiable Certificates of Deposit and on Treasury

Bills, January 1990–January 2010

Source:

http://www.federalreserve.gov/releases

.

Commercial Paper

Commercial paper securities are unsecured promissory notes, issued by corpora-

tions, that mature in no more than 270 days. Because these securities are unsecured,

only the largest and most creditworthy corporations issue commercial paper. The

interest rate the corporation is charged reflects the firm’s level of risk.

Terms and Issuance

Commercial paper always has an original maturity of less than

270 days. This is to avoid the need to register the security issue with the Securities

and Exchange Commission. (To be exempt from SEC registration, the issue must

have an original maturity of less than 270 days and be intended for current trans-

actions.) Most commercial paper actually matures in 20 to 45 days. Like T-bills,

most commercial paper is issued on a discounted basis.

About 60% of commercial paper is sold directly by the issuer to the buyer. The

balance is sold by dealers in the commercial paper market. A strong secondary mar-

ket for commercial paper does not exist. A dealer will redeem commercial paper if

a purchaser has a dire need for cash, though this is generally not necessary.

History of Commercial Paper

Commercial paper has been used in various forms

since the 1920s. In 1969, a tight-money environment caused bank holding compa-

nies to issue commercial paper to finance new loans. In response, to keep control over

the money supply, the Federal Reserve imposed reserve requirements on bank-issued

commercial paper in 1970. These reserve requirements removed the major advantage

G O   O N L I N E

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Chapter 11 The Money Markets

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