Commercial Paper As A Source Of Short-Term Financing

Commercial Paper As A Source Of Short-Term Financing-25
Lacking such a market, their value is based on models that are sensitive to a number of assumptions.- In addition, other variations of CP have been introduced in the market in recent years, including extended liquidity notes (also called extendible or structured notes) in which the maturity of the notes may extend beyond their original maturity date in the case of a default.

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Some SIVs take advantage of spread differentials in fixed income securities, earning interest rate arbitrage profits.

SIVs may invest in various asset categories, some of which are difficult to value because they do not trade on any active market.

Government investors should regularly evaluate whether the incremental yield associated with commercial paper justifies the additional credit and liquidity risk associated with this type of security.

Governments choosing to use CP should develop policies and procedures to manage the associated risks.

Important sources of short term financial planning are as follows: First of all short-term financial planning must make a forecast of future cash flows.

It has two objectives – first, to decide whether the company will have surplus cash or cash deficit; and second, whether it is of temporary or permanent nature.

These multiseller ABCP programs issue CP backed by the cash flows from all the underlying assets.

The goal of such multiseller Programs is to enjoy the diversification from multiple sellers of various industries.

Changes affecting individual issues as well as the overall market conditions can take place so quickly that investors do not have the opportunity to sell the security. State statutes vary as to the ability and limits of governments to purchase CP.

For these reasons, CP is generally less liquid than U. GFOA recommends that if a government chooses to use CP in its investment portfolio, it cautions government investors to: 1) verify whether commercial paper is allowed under state statute and their investment policy and 2) determine whether they have the expertise to understand, evaluate and monitor commercial paper before deciding to include commercial paper as part of a diversified investment portfolio.


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