Papers Repurchase Agreements

Commercial

Submitted By: Manpreet Singh Sidhu

Commercial paper is a short term debt instrument issued by a company. It is usually issued in order to meet short term requirements rather than fund long term investments. Commercial papers are issued at a discount and have a maturity period of a minimum of 30 days and a maximum of 364 days. Only highest rated firms are able to sell C.Ps at reasonable price.

Characteristics:

It is unsecured. It is short term (maturity and full repayment usually within an year of issue).

Say Future Group, the owner of a large retail store like Big Bazaar, wishes to raise funds from the market to purchase its merchandise. If it were to go to a bank for a loan, then it would probably have to pay around 15% interest on the loan. But from the open market it could perhaps get the loan at only 10%. Hence by resorting to an instrument like CP, the organization gains 5%.

Cheaper source of funds than limits set by banks Highly liquid, can be transferred by endorsement livery Backed by liquidity and earnings of the issuer Involves less paperworklities

Examples : Tata's, ICICI are companies issue CP because they need money for lending business.

It is a sale of securities with an agreement to repurchase the same on a future date and at a specific price. In a repo, the borrower agrees to sell immediately a security to a lender and also agrees to buy the same security from the lender at a fixed price at some later date. Characteristics: They are short-term loans 10 15 days or up to 6 months They are safer as a secured investment since the investor receives collateral

For the buyer, a repo is an opportunity to invest cash for a customized period of time Repo transactions are allowed only among RBIapproved securities like state and central government securities, T-bills, PSU bonds, FI bonds and corporate bonds. It helps banks to invest surplus cash. It helps borrower to raise funds at better rates

Institutions like Banks who deal in government securities use this instrument as a form of overnight borrowing.