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Credit quality of the borrower: The credit quality of the borrower determines the type of religion favored by the borrower or the kind of debt that can be easily accessed by the company. Borrowers with medium credit quality generally prefer bank loans. Bonds issued by borrowers such carry a higher interest rate than the interest rate on bank loans. This is because, claim bondholder is a subsidiary of Bank of claim. In the event of default, the bank has accepted the claim on the assets of the company. Means poor credit quality of the borrower ensures that prevents access to bank loans.
Commercial Paper is a short-term unsecured Promissory Note of Prime Corporation.
AS bank funding increased , competition for loan put downward pressure on loan yield and interest spread over cost of bank funds. High quality corporate borrowers have always had the option to issue commercial paper rather than borrower from Bank.
Pros
Commercial Paper (CP) rates are much cheaper than Bank loan rates (even from the short-term rates).
Cons:
CP can normally be retired only at the end of the term, whereas the bank loan can be retired any time. So, interest on the CP amount is paid for the entire term of the CP. The interest on the Bank loan would be only for the period it remains outstanding.
Agree with Mr. Vinod.
PROS:
The commercial paper is usually cheaper alternative than a short-term loan from a bank for its lower rate.
Cons.
Only large credit worthy companies sell commercial papers because only they can attract investors who will lend them money for low rates than bank charges for short-term loans.
Agreement with the answer given by Mr. Vinod Jetley..
Commercial paper entails credit risk, and programs are rated by the major rating agencies. Because commercial paper is a rolling form of debt, with new issues generally funding the retirement of old issues, the main risk is that the issuer will not be able to issue new commercial paper. This is called rollover risk.
In my point of view the pros cons of commercial paper
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 market3) 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 maturity8) 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.
AGREE WITH ALL ANSWERS
Commercial paper is usually a cheaper source of short-term financing for a firm, compared to bank loans. Also, a larger amount of funds can often be raised by issuing commercial paper. Bank loans are usually a more flexible source of short-term financing and establishing an on-going business relationship with a bank may prove beneficial when money is tight.
