Raise funds more cheaply by selling commercial paper

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Unformatted text preview: rectly placed with investors by the issuer or is sold by dealers in commercial paper. Most of it is purchased by other businesses and financial institutions. raise funds more cheaply by selling commercial paper than by borrowing from a commercial bank. The reason is that many suppliers of short-term funds do not have the option, as banks do, of making low-risk business loans at the prime rate.9 They can invest safely only in marketable securities such as Treasury bills and commercial paper. The yields on these marketable securities on May 1, 2002, when the prime rate of interest was 4.75 percent, were about 1.73 percent for 3-month Treasury bills and about 1.80 percent for 3-month commercial paper. Although the stated interest cost of borrowing through the sale of commercial paper is normally lower than the prime rate, the overall cost of commercial paper may not be less than that of a bank loan. Additional costs include the fees paid by most issuers to obtain the bank line of credit used to back the paper, fees paid to obtain third-party ratings used to make the paper more salable, and flotation costs. In addition, even if it is slightly more expensive to borrow from a commercial bank, it may at times be advisable to do so to establish a good working relationship with a bank. This strategy ensures that when money is tight, funds can be obtained promptly and at a reasonable interest rate. International Loans In some ways, arranging short-term financing for international trade is no different from financing purely domestic operations. In both cases, producers must finance production and inventory and then continue to finance accounts receivable before collecting any cash payments from sales. In other ways, however, the short-term financing of international sales and purchases is fundamentally different from that of strictly domestic trade. International Transactions The important difference between international and domestic transactions is that payments are often made or received in a fo...
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