DEFINITION of 'Paper Dealer'

A paper dealer is a market maker that buys and sells extremely short-term corporate bonds called commercial paper. A paper dealer is typically a large financial firm that has the capital and level of sophistication necessary to distribute commercial paper to investors on behalf of borrowing corporations and to make a market in commercial paper, setting prices at which it is willing to buy and sell.

BREAKING DOWN 'Paper Dealer'

Commercial paper is an unsecured money market security issued by firms looking to raise capital in the short term. The paper is typically issued at a discount to par with a maturity date of not more than 270 days. Lenders of commercial paper are typically institutional investors who purchase the securities for money market funds. Other major buyers of commercial paper are pension funds, insurance companies, state and local governments, and corporations. Lenders can purchase commercial paper directly from the institution or from a paper dealer.

Issuing companies that prefer not to administer their own programs, will seek the services of a paper dealer. A paper dealer is a principal that purchases commercial paper from an issuer and resells them to investors. An investor who purchased the original issue and wishes to sell can do so through the liquidity provided by the dealer who stands ready to purchase the paper from the investor. If the issuer needs to increase the amount of its outstanding paper, it may contact its paper dealer on the morning of the day the funds are required, given that no advance notification is required. The dealer takes a small markup on the paper they place to investors by charging a fee to the issuer based on the amount of commercial paper outstanding.

Paper dealers are used by corporations that wish to access the public markets for their short-term borrowing needs. By issuing commercial paper, a corporation may be able to obtain a larger amount of financing and/or obtain a lower interest rate on its short-term borrowings, as compared to seeking a bank loan or other short-term credit facility. In addition, paper dealers offer financial advice to issuers, especially first-time issuers who require advice on how to deal with rating agencies and create investor interest. Since paper dealers act as principals, that is, they buy and sell commercial paper to make a profit, they are regulated by the Securities and Exchange Commission (SEC) which requires that all dealers trade securities as a business.

Occasionally, individual or retail investors can buy commercial paper directly from the issuing corporation. However, it is more common for retail investors to invest in commercial paper through a money market fund, short-term bond fund, or exchange-traded fund (ETF).

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