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The Market for Commercial Papers

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Read "The Ebb and Flow of Commercial Paper"

Respond to the following:

- What factors contribute to an expansion of the commercial paper market?
- What factors cause a contraction in the commercial paper market?
- How do companies use commercial paper to raise short-term funds?
- Who can issue commercial paper? Who buys commercial paper?

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https://brainmass.com/business/business-and-industry-analysis/the-market-for-commercial-papers-584212

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Note: The write-up below gives only suggestions, hints, and guides. You can enhance/rewrite it in whatever you want.

• What factors contribute to an expansion of the commercial paper market?
- Difficult economic environment post 911 era
- Difficult credit environment
- Desire by corporate issuers to reduce exposure to financing risks hence commercial papers are not backed up by collateral
-Credit crisis

• What factors cause a contraction in the commercial paper market?
-Pick-up in economic growth which spurs the need for short-term debt to finance working capital
- Sudden surge of buying ...

Solution Summary

Commercial papers are used by companies to sourced out funds easily. This posting discusses how the market for commercial papers expands and contracts. It also qualifies who are the issuers and buyers of commercial papers.

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What is the discount yield, bond yield, and effective annual return on a $1million Treasury bill? Calculate the T-bill's quoted discount yield. Calculate the T-bill's bond equivalent yield. Calculate the discount yield and bond equivalent yield on the commercial paper. Calculate the conversion value of each bond. Calculate your monthly payments on this mortgage. What is mortgage sale?

1. What is the discount yield, bond yield, and effective annual return on a $1million Treasury bill that currently sells at 97 3/8 percent of its face value and is 65 days sells at maturity?

2. Suppose you purchase a T-bill that is 125 days from maturity for $9,765. The T-bill has a face value of $10,000.
a. Calculate the T-bill's quoted discount yield.
b. Calculate the T-bill's bond equivalent yield.

3. You can buy commercial paper of a major US corporation for $495,000. The paper has a face value of $500,000 and is 45 days from maturity. Calculate the discount yield and bond equivalent yield on the commercial paper.

4. You can invest in taxable bonds that are paying a 9.5 percent annual rate of return or a municipal bond paying a 7.75 percent annual rate of return. If your marginal tax rate is 21 percent, which security should you buy? Hilton hotels corp has a convertible bond issue outstanding. Each bond, with a face value of 1000 can be converted into common shares at a rate of 61.2983 shares of stock per 1000 face value bond ( the conversion rate), or $16.316 per share. Hilton's common stock is trading (on the NYSE) at $15.90 per share and the bonds are trading at $975.
a. Calculate the conversion value of each bond.
b. Determine if it is currently profitable for bond holders to convert their bonds into shares of Hilton common stock.

5. Why are mortgage markets studied as separate capital market?

6. You plan to purchase a 100,000 house using a 30 year mortgage obtained from your local credit union. The mortgage rate offered to you is 8.25 percent. You will make a down payment of 20 percent of the purchase price.
a. Calculate your monthly payments on this mortgage.
b. Calculate the amount of interest and, separately principal paid in the 25th payment.
c. Calculate the amount of interest and, separately principal paid in the 25th payment.
d. Calculate amount of interest paid over the life of this mortgage.

7. What is mortgage sale? How does a mortgage sale differ from the securitization of mortgage?

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