Working Capital Management Question:
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Explain what are commercial papers? Who can issue commercial papers?


Commercial papers are an unsecured promissory note issued at a discount with a fixed maturity of 1-270 days. The rate of discount is decided by the issuer and is not regulated. It carries higher interest repayment rates than bonds. It is basically money market securities issued by large banks and corporation to get money to meet short term debt obligations and are backed by corporation’s promise to pay face value on the maturity date of the commercial note. It is of fixed maturity. Firms with excellent credit rating from a recognized rating agency will be able to sell their commercial paper at a reasonable price. A company can issue the Commercial Paper provided:

1) The minimum tangible net worth of the company should not be less than Rs.40mn as per the latest audited balance sheet.

2) Company has been sanctioned working capital limits by banks or Financial Institutions.

3) Borrowed amount of the company is classified as a standard asset by the bank.

4) The company should have minimum credit rating from an agency approved by RBI.

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