Typically, interest rate of commercial paper is lower than banks’ rate. So, why do investors chose to invest in it instead of putting their money into banks? Thanks.
Corporations issue commercial paper to borrow money. The interest the corporations pay investors is cheaper than what they would have to pay to borrow money from the bank. It’s not about investors getting a return, it’s about corporations paying lower interest rate to borrow.
I mean that who will buy comercial paper? And what benefits for them compared with bank deposits? Clearly, Issuer is benefit but investor is not in this case. Borrowing cost on issuers side is the same with investors’ return…
Sometimes it can be for relationship purposes or sometimes the rates can be more favourable - it depends on the individual issue.
“interest rate of commercial paper is lower than banks’ rate” I dunno about that - if you match on credit quality and liquidity, commercial paper should have higher rates. Commercial paper is a staple of money market funds. If you have a money market fund, you have bought commercial paper. It’s an excellent place to park money for the very short term with great liquidity (we’re having a few problems right now).
Money market funds are the biggest investors of commercial paper. Since people view them as cash equivalents, they’re not seeking extra yield and will typically invest in high grade short term securities such as CP, repo agreements, munis, etc.
Ok, i see. Thank all so much. “High risk-high yield”. That is, banks’ risk is higher than corporations’ risk (corporations who issue commercial paper with lower rates). Commercial paper and other low-risk securities as well are option for investors who accept lower return for safety. Thanks again.
So who has a greater default risk? Bank or Corporation? I would have thought the chances for a company to go bust would be higher than a bank?
Depends… Lots of bank deposits are FDIC (or similar) insured