Thursday, October 21, 2010

Bond Type: Commercial Paper versus Medium Term Notes




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Commercial Papers (CP) and Medium Term Notes (MTN) are bond that is different in terms of tenure. Generally, CPs are short-term bonds that have maturity of less than 1 year whereas MTNs are long-term bonds that have maturity of 1 year of more.

In terms of ratings, due to the peculiarity of the tenure classes, the way credit risk is assessed is different with different rating scales.  Generally, the purpose of the two types of structures are as follows:
1.CP: usually used for short-term cash flow management purposes.
2.MTN: usually used for mid- to long-term capital investments

Risks:
 
1.Issuers using CPs to finance mid- to long-term capital investments can face liquidity issues if no investors wants to rollover a CP programme upon maturity.
 
2.Moreover, the cost of a CP programme cannot be locked. Re-pricing will happen upon rollover.

2 comments:

  1. Hi
    Would you know what is the current maturities allowed for MTNs in Malaysia by the SC? It was previously 2-7 years...

    ReplyDelete

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