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Direct paper is issued mainly by large finance companies and bank holding
companies directly to the investor.
Advantages
Relatively low interest
rates
Flexible interest rates choice of dealer or direct
paper
Large amounts may be
borrowed conveniently
The ability to issue paper
gives considerable
leverage when
negotiating with banks
Disadvantages
Risk of alienating banks
whose loans may be
needed when an
emergency develops
May be difficult to raise
funds in the paper
market at times
Commercial paper must
generally remain
outstanding until
maturity - does not
permit early retirement
without penalty
A bankers acceptance is
a time draft drawn on
and endorsed by an
importers bank.
Acceptances are used in
international trade
because most exporters
are uncertain of the
credit standing of their
importers.
The issuing bank
unconditionally
guarantees to pay the
face value of the
acceptance when it
matures, thus shielding
exporters and investors
in international markets
from default risk.
Acceptances carry
maturities ranging from
30 to 270 days, with 90
days being the most
common.
They are traded among
financial institutions,
industrial corporations,
and securities dealers as
a high-quality
investment and source
of ready cash.
The Eurocurrency
market has arisen
because of the
tremendous need
worldwide for funds
denominated in dollars,
Euros, pounds, and other
relatively stable
currencies.
The Eurocurrency market
represents the largest of
all money markets
worldwide, with total
funds probably in excess
of $4 trillion.
Most Eurocurrency
deposits are short-term
deposits ranging from
overnight to one year,
although a small
percentage are longterm time deposits.
Eurocurrency deposits
are known to be volatile
and highly sensitive to
fluctuations in interest
rates and currency
prices. They also carry
political risk and default
risk.