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Question
'Mission Coach Ltd.' is a large and creditworthy company manufacturing coaches for Indian Railways. It now wants to export these coaches to other countries and decides to invest in
new hi-tech machines. Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost, the company decides to tap the money market.
1) Name and explain the money-market instrument the company can use for the above
purpose
2) What is the duration for which the company can get funds through this instrument?
3) State any other purpose for which this instrument can be used.
Solution
a. Commercial paper can be used by Mission Coach Ltd. It is a promissory note which is negotiable and transferable. It is primarily used by large and credit-worthy companies for bridge financing. In other words, it is used as an alternative to borrowings from banks and the capital market. On commercial paper, companies pay an interest rate lower than market rates
b. Commercial papers have a maturity period ranging from a minimum of 15 days to a maximum of 1 year.
c. Commercial paper can be used to finance the seasonal and working capital requirements of enterprises
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