List and describe at least three advantages accrue to the user of commercial paper

Question

What will be an ideal response?

Answer 1

1. Interest rate: commercial paper rates are generally lower than rates on bank loans and comparable sources of
short-term financing; 2. Compensating-balance requirement: no minimum balance requirements are associated with
commercial paper. However, issuing firms usually find it desirable to maintain line-of-credit agreements sufficient to
back up their short-term financing needs in the event that a new issue of commercial paper cannot be sold or an
outstanding issue cannot be repaid when due. 3. Amount of credit: commercial paper offers the firm with very large
credit needs a single source for all its short-term financing. Because of loan amount restrictions placed on the banks by
the regulatory authorities, obtaining the necessary funds from a commercial bank might require borrowing from a
number of institutions; 4. Prestige. Because it is widely recognized that only the most creditworthy borrowers have
access to the commercial paper market, its use signifies a firm's credit status.