What Is Fine Paper?
Fine paper can refer to high-grade securities whose credit rating makes them almost risk-free or to commercial paper issued by blue-chip companies with a low probability of default. Investing in fine paper is considered to be a safe investment but also one that comes with a low level of return due to the low risk of the instruments.
- Fine paper can refer to high-grade securities whose credit rating makes them almost risk-free, or to commercial paper issued by blue-chip companies with a low probability of default.
- Fine paper usually trades at a very small spread over government-issued fixed-income securities which reflects that, though considered safe, there is still some risk.
- Issuers are not required to register commercial paper with the SEC if the maturity is less than 270 days.
- In general, due to the low risk of fine paper, the returns on these types of investments are also fairly low.
- Commercial paper is an unsecured investment so if the issuer defaults, the investor has no recourse to claim any losses.
- The Federal Deposit Insurance Corporation (FDIC) does not insure commercial paper.
Understanding Fine Paper
Fine paper is commercial paper, which is short-term debt that companies issue to raise money for specific projects. Commercial paper is a type of investment offered by companies, not banks or governments. Commercial paper is similar to a bond, in that it is issued for a specific amount of time at a specific rate.
Commercial paper is an unsecured investment because each issue is not backed by anything. If the issuing company defaults, there is nothing the investor can claim as compensation.
Commercial paper is not insured by the Federal Deposit Insurance Corporation (FDIC), and it is exempt from Securities Exchange Commission (SEC) registration requirements if the maturity does not exceed 270 days. Commercial paper typically has short durations and returns are usually much lower compared with other types of investments.
Blue-chip companies that have been in business for decades are often viewed as being solid and safe investments. As such, this means there is little risk these established companies will default on their debts, so fine paper issued by blue chips is considered an extremely safe investment. Fine paper usually trades at a very small spread over government-issued fixed-income securities.
Fine Paper and The Great Recession
In the early days of the Great Recession of 2008, banks and financial institutions were afraid to lend money to each other, resulting in a credit crunch. This affected the commercial paper market because—as unsecured investments—commercial paper was suddenly seen as significantly riskier than it had been. Fine paper was seen as risky as well.
Despite the fact that blue-chip companies were the issuers of fine paper, investor confidence was shaken by the implosion of financial companies previously thought "too big to fail." This could be witnessed in the difficulty that many companies across the nation were having, such as General Motors. After the government took steps to stabilize financial markets, eventually financial institutions began lending again and investors were able to invest in the commercial paper market once more.
Fine Paper Market
Companies issue commercial paper in order to finance short-term needs, such as inventory, accounts payable, and working capital needs. This is usually for financing a period of time of less than one year. The paper is offered at a discount and the borrower receives the face value of the paper upon maturity, as commercial paper doesn't usually offer set interest payments.
Notes payable is another form of financing that is used when the financing term is less than a year. For financing needs greater than a year, a company will issue bonds; either investment-grade bonds or high-yield bonds.
The discounts and yields for commercial paper are calculated using a yearly day count convention, which is 360 in the United States. The rates are determined by the FED and it uses a variety of data to determine the relation between trades made by different issuers and maturities.
For accounting purposes, commercial paper is reported as a current liability on a company's balance sheet as they are debt obligations that need to be paid back in less than a year. Companies do often roll over their commercial paper.