The maximum maturity of commercial paper is 270 days. Why would a firm issue commercial paper instead of longer-term securities,
Motive to Issue Commercial Paper
The maximum maturity of commercial paper is 270 days. Why would a firm issue commercial paper instead of longer-term securities, even if it needs funds for a long period of time?
Here is a tip:
The line of credit is defined as the credit facility that a bank or other financial institution extends toward the government, businesses, or individuals, thus helping the customer to draw on the facility when it requires some funds.
Institutions that issue commercial papers maintain a backup line of credit in case they are unable to reissue the papers at a reasonable rate because their ratings are lessened. Commercial banks provide a backup line of credit which gives the company the right to borrow a specific, maximum amount of funds for a particular period of time.
A commercial paper is a less expensive source of funds and has an option to maintain the lines of credit, providing rights to the company to borrow a particular amount of fund for a certain period of time. Therefore, firms prefer issuing commercial papers instead of long-term securities.
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