Eplain commercial paper with its limitation.

Solution

1. A commercial paper is sord on an unsecured basis and does not contain any restrictive conditions.

2. It provides more funds compared to other sources. Generally, the cost of CP to the issuing firm is lower than the cost of commercial bank loans.

3. As it is a freely transferable instrument, it has high liquidity.

4. Commercial paper provides a continuous sources of funds. This is because their maturity can be tailored to suit the requirements of the issuing firm. Further, maturing CP can be repaid by selling new CP.

5. Companies can park their excess funds in CP thereby earning some goods return on the same.

Limitations of commercial paper :

1. Only financial sound and highly rated firms can raise money through commercial papers. New and moderately rated firms are not in a position to raise funds by this method.

2. The size of money that can be raised through CP is limited to the excess liquidity available with the suppliers of funds at a particular time.

3. CP is an impersonal method of financing. As such if a firm is not in position to redeem its paper due to financial difficulties, extending the maturity of CP is not possible.

Some More Questions From Sources of Business Finance Chapter

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Sources Of Business Finance

Eplain commercial paper with its limitation.

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