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variation)
The annual interest rate offered by debt securities at a given point in time varies among debt
securities. Consequently, the yields offered by debt securities at a given point in time have a
particular structure. Some types of debt securities always offer a higher yield than others.
Individual and institutional investor must understand why quoted yields vary so that they can
determine whether the extra yield on a given security outweighs any unfavorable characteristics.
Securities with different characteristics influence the yield to be offered. In general, securities
with unfavorable characteristics will offer higher to entice investor. The yields on debt securities
are affected by the following characteristics:
1.
2.
3.
4.
Credit(default )Risk
Liquidity risk
Tax status
Terms to maturity
Commercial paper
An unsecured, short-term debt instrument issued by a corporation, typically for the financing of
accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial
paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting
prevailing market interest rates.
Financial institution such as financial companies and bank holding companies are major issuer of
commercial paper. The minimum denomination of commercial paper is usually $100000.
Primary benefit to largest & most creditworthy issuers is: Cost of borrowing is lower than at a
commercial bank