Answer to Question #264046 in Finance for Robert

Question #264046

Discuss the benefits and drawbacks of commercial papers as an investment vehicle

1
Expert's answer
2021-11-10T17:43:12-0500

BELOW ARE THE ADVANTAGES AND DISADVANTAGES OF COMMERCIAL PAPERS AS AN INVESTMENT VEHICLE


Advantages of commercial papers:


1) It is quick and cost effective way of raising working capital.


2) Best way to the company to take the advantage of short term interest fluctuations in the market


3) It provides the exit option to the investors to quit the investment.


4) They are cheaper than a bank loan.


5) As commercial papers are required to be rated, good rating reduces the cost of capital for the company.


6) It is unsecured and thus does not create any liens on assets of the company.


7) It has a wide range of maturity


8) It is exempt from federal SEC and State securities registration requirements.



Disadvantages of commercial papers:


1) It is available only to a few selected blue chip and profitable companies.


2) By issuing commercial paper, the credit available from the banks may get reduced.


3) Issue of commercial paper is very closely regulated by the RBI guidelines.


4) The disadvantage of commercial paper is that the maturity is from 30 days to 270 days, with most commercial paper having only a 30-day life. The company has to be able to have access to the market to refinance its commercial paper when it becomes due.


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