Other Methods Of Dealing In Commercial Paper

Though the commercial paper broker is considered of great importance in the proper distribution of acceptances, where his services in bringing buyer and seller together help supply to meet demand, this is not the only way in which commercial paper dealings are carried on. Banks sometimes deal directly with other banks, and sometimes deal with firms having commercial paper, direct, without the intermediaries. However, the commercial paper broker, because he is familiar with market provisions of commercial paper and knows the sources of demand most favorable to the seller as well as to the buyer, should be utilized wherever and whenever possible.

Acceptance A Favorable Item Of Investment

The acceptance is fast becoming a favorable item of investment with the banks and investing classes. Not only is there an advantage to the banks and general financial establishments in investments in acceptances, but also to the individual, firm and to the corporation which have at various times during the course of their business operations surplus funds which could be used for investments.

Example Of Use

As an illustration, assume that a corporation has declared a dividend on its capital stock to be payable two months hence. Let us further assume that it desires to meet this future contingency and that it has ample funds on hand for the purpose. In order to avoid unprofitableness in allowing such funds to remain on deposit till it is necessary that they be disbursed, an investment in high grade bank acceptances having a maturity approximating the due date of the dividends, would give to the corporation a means of employing its funds until required. The case of the business establishment or individual is much the same, they being enabled also to loan out their surplus funds and to purchase prime commercial paper of the "acceptance" class, at better yields than otherwise for short term investments.

Discount Corporations

Coincident with the development of the Federal Reserve System permitting member banks to accept up to a certain percentage of their capital and surplus, there has also been developed in this country, as a result of the demands upon the business and financial world, a number of so-called discount corporations, which make a specialty of "accepting" paper and which are regulated in their operations in much the same way as are member banks. These acceptances arising out of commercial transactions are very high-class investments for member banks, individuals and. in fact, are sought by the Federal Reserve Banks throughout the country, as investments.

The Federal Reserve Banks And Their Investments In Acceptances

The growth of the investment business in acceptances by the Federal Reserve Banks has risen to many hundreds of millions of dollars during the past year, which bears evidence to the fact that they are a very desirable method of employing surplus funds.

Again, the rates established for the discount of bankers' acceptances, generally lower than those of call loans, still bear with them a greater advantage in the better security offered and the better means of liquidity, which should make them far more preferable as investments.