TeachMeFinance.com - explain Commercial Paper
commercial paper -- a written agreement setting forth the terms and conditions under which funds are borrowed by a corporation and promising to repay the debt. Commercial paper is issued by large corporations of good credit standing to borrow unsecured funds for a short time, usually 90 days, but no more than nine months. Commercial paper is bought, sold, and traded by individual and corporate investors.
Commercial Paper -- Negotiable instruments used in commerce. Usually they are short term, unsecured, promissory notes issued by highly rated entities and are traded on the money markets.
Commercial pape -- Negotiable instruments calling for the payment of money, issued in the course of business, as bills of exchange (drafts), promissory notes, etc. As generally interpreted commercial paper means acceptances (drafts or bills of exchange which have been accepted) and promissory notes. Under the head commercial paper properly come drafts drawn against purchasers of merchandise or products and promissory notes made by them ; or drafts drawn against manufacturers for materials supplied and promissory notes made by them. Accommodation paper is included under the head commercial paper when it is made (in the case of a promissory note) or drawn (in the case of a draft or bill of exchange) by a concern or individual for use in mercantile or commercial business. Accommodation paper consists of drafts or bills of exchange drawn, accepted or indorsed or of promissory notes made or indorsed without consideration by one party to enable another to obtain credit or to raise money. A promissory note that has been received for goods sold and that has in order to effect its discount (sale) been indorsed by the party who received it is known as a bill receivable. Single-name paper is paper that is not indorsed; doublename paper is paper with an indorsement. Another designation for single-name paper is straight paper ; in fact it is a common practise to speak of paper without indorsement as straight paper. Negotiable drafts and notes by reason of the fact that they are negotiable are themselves articles of commerce articles which may be bought and sold the same as commodities. The varieties of commercial paper are designated by trade names. For instance, the paper made (issued) or the paper indorsed and sold by dry goods commission houses is known as commission house paper; that made by cotton and woolen mills is known as mill paper, and so on. Bank paper (an abbreviation of bankable paper) is the name applied to paper that is of such good quality that a bank will readily discount (buy) it. Accordingly, it also applies to paper when it bears the indorsement of a bank. The usual manner in which a bank becomes the indorser of commercial paper is in rediscounting. First it buys (discounts) the paper and then it sells (rediscounts) it if it needs cash or if it can make a satisfactory profit by a sale. The paper brings a better price (the discount is less) with the bank's indorsement than it would bring without the bank's indorsement. Commercial paper when in the form of a promissory note does not as a rule bear interest. The discount in the first instance cannot under the law be greater than the amount of legal interest on it that is to say, the commercial paper dealer or the bank which takes the note from the maker cannot deduct more than the legal rate of interest, although the dealer or bank may subsequently dispose of the paper at any price he or it sees fit. The business of buying and selling commercial paper is an extensive one. Many individuals as well as banks are engaged in it. Individual dealers buy from makers at one rate of discount and sell to banks or other dealers at a lower rate. For instance, they will buy at a discount of 5 per cent and resell at a discount of 4 per cent ; in such an operation they make a profit of i per cent. Banks also resell to other banks. If negotiable commercial paper pledged to a bank as security for a loan or debt falls due and the bank fails to present it for payment and to have it protested if dishonored the bank is liable to the owner for the full amount of the paper. Sometimes the owner of commercial paper has the right to demand payment before maturity, as, for instance, when a draft has been protested for non-acceptance and proper notice has been served the holder may proceed against the drawer and indorsers.
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