The following is an extract from an article in The Irish Times of Wednesday 6th July, 2016:
CRH has established a commercial paper program in the United States, allowing it to issue up to $1bn of debt.
The Dublin-based building materials group has said that it may use the programme to issue unsecured short-term promissory notes in the private placement market in the US “from time to time”
Moody’s, the ratings firm, affirmed its Baa2 long term rating and stable outlook on CRH following the commercial paper announcement. It said CRH’s ratings were supported by its good product and geographical diversification and more resilient performance than peers to the industry’s downturn in 2009.’
a) What is commercial paper? Is it a money market security or a capital market security? Explain your answer.
b) Suppose that CRH’s investment bankers help the company to issue $100mn (face value) of 180 day commercial paper at an annual yield of 3.9%. How much would investors pay for this issue?
c) What is the role of Moody’s in the issuance of commercial paper by CRH?
d) What are the main similarities and differences between commercial paper and bank bills? CRH is issuing commercial paper to raise funding. Why might another company find it cheaper to use bank bills instead?