Table of contents

2 Abstract

3 Introduction

4 Literature Review

8 Treasury Bills vs Commercial Papers

16 Conclusion

17 Refernces

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 Abstract

The purpose of the research is to clarify what is better for investors to purchase; we have
searched the internet in order to provide information to know which is safer, reliable and
common.
As mentioned in the table of the contents we made a comparison between two financial
instruments (treasury bills vs commercial papers). In the literature review we delivered
some quotes from people who used these instruments and they analyzed the prices’
fluctuations in the past and present years in order to predict the prices of the possible
future. At the end we made conclusion which includes the result of this research, and we
made references if you are interested to check more about these financial instruments.

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 Introduction

We as human beings and citizens we need to ensure our future is safe, so financial
instruments are methods to provide people a better future with a possible risk-free way.
There are a lot of questions that could be asked, ex. (Are financial instruments safe that we
could purchase without having troubles?).
We can’t deny that nothing is safe, but that there are a lot of choices. we have to pick the
right choice in order to avoid troubles and waste of money.
But how can we pick the right choice? We need to analyze and see what suits what.
However, the analysis process should be accurate and well-structured in order to
differentiate the best choice.

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 Literature Review
Michael Lingenheld  
 .  
Successful investing, particularly in macro, boils down to finding attractive risk/reward bets.
Typically, when you’re betting on events or scenarios that have never happened before, the
risk/reward profiles are attractive because the market doesn’t have historical precedent to
price risk. On Monday, for the first time ever, investors bought $21 billion worth of 3-month
US Treasury bills with no yield. The lowest bid permitted for a US bill auction is 0% but
ahead of the sale, four week and three-month bills were trading at negative yields in the
secondary market.

Analysts were quick to point out this was partially caused by supply/demand fundamentals.
Once again Republicans are pulling the only political lever they left by refusing to raise the
debt ceiling. This restricts the number of T-bills available and, assuming demand remains
constant, the price should rise and yields fall. But there’s more to it than that. Investors have
been spooked and there’s a massive flight to safety taking place in the market right now.

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T-bills with negative yields are new to the US, but not Europe. The yield curve for sovereign
debt in Switzerland, also thought to be a safe haven, is negative out to 12 years. German
Bunds, another safe-haven asset, have negative yields out to 5 years. Even in countries
that aren’t traditional safe-havens, like the Czech Republic, yields are below zero out to 6
years. Negative yields have been around for several years now, meaning the market has
had time to price risk. But they’ve never been deeply negative, and they’ve never dropped
below zero in the US past 12-month maturity.

Of all the examples listed above, it’s easiest to compare the US to Switzerland because of
their currencies. In January, the SNB removed the floor under EUR/CHF and the Franc
skyrocketed, snuffing out any hope of inflation. Swiss benchmark deposit rates are -0.75%
but the real yield on 2Y Swiss bonds is +0.7% because the country’s in outright deflation.
You could argue that QE’s 1-3 were currency intervention, but the Fed never pegged USD
and a 20% intraday move seems extremely unlikely. However, if USD keeps moving higher
it will hamper inflation and keep UST yields under heavy pressure; like Switzerland, but
without the shock.

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As we scan the globe for attractive risk/reward bets, maybe the best one is the US bond
market – staring us right in the face. The December 2019 Eurodollar future implies 3-month
yields at 2.25%. Nobody wants to buy this contract because negative rates in the US have
never happened before. It’s hard to be long here because bonds have already rallied a lot,
but you could’ve said the same thing in 2012. As investors pile into safety assets and the
economy slumps, keep in mind the risk/reward. Just because it has never happened before
doesn’t make it the wrong bet.

John S. Tobey , CONTRIBUTOR

I write about investment themes being overlooked or misinterpreted.

The ongoing challenge with timing stock investments is that clear signs rarely precede a
price move. Speculation rests on divining probable futures, typically about six months in
advance. However, for Caterpillar CAT +0.97%, I think we have the advantage of some
leading indicators: namely, copper, coal and Canadian stocks. Here’s how it fits into our
planning…

Last Friday (11/22) I discussed the potential future gains possible from Caterpillar
(“Caterpillar Is 2013′s Right Place, Wrong Time Stock – Brighter Days Ahead”). The
question is how do we capture them without getting in too early and having to hold a
frustrating, “dead money” investment?

One approach is to invest now for the long-term, expecting that we are probably early, but
being willing to sit with a 2.9% dividend holding. The reasonable expectation is that when
Caterpillar’s prospects do turn up, the return could well compensate for any preceding no-
growth period.

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The second approach is to more closely time the Caterpillar buys to changes in the critical
non-market factors. It just might work this time.

Two reasons to expect an advance signal for Caterpillar’s improving

First is the current stock market. The plethora of high performing stocks has left laggards
like Caterpillar standing alone in the corner. Yes, there are periodic bouts of speculation
(e.g., the recent Blackberry activity), but stock investors are generally looking elsewhere.
The term is “ignored stocks” and applies well to Caterpillar in this market. Therefore, signs
could emerge before investors fully respond.

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 Treasury Bills vs Commercial papers

BREAKING DOWN 'Treasury Bill

Treasury bills are attractive to investors since they offer a generally safe approach to
acquire an ensured return on contributed cash .they advantage the U.S government in light
of the fact that the administration utilizes the cash raised from offering treasury bills to
finance different open tasks, for example, the development of schools and thruways.
additionally T-bills can have developments of only a couple days into the greatest of 52
weeks , yet normal developments are one month , three months or six months .the longer
the maturity date the higher the interest rate that T-bills will pay to investor

Purchase Process
T-bills can be obtained at auctions held by the U.S government, or investor can buy T-bills on
the secondary market that have money been previously issued .T-bills acquired at auction are
evaluated through an aggressive offering process at the discount from the standard quality (par
value) .when investors recover their T-bills at development they are paid the standard worth, the
difference between the price tag and the standard worth is interest.

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Benefits to Investors
There are many advantages that T-bills offer to investor. They are viewed as generally safe
investment (low risky investment) since they are upheld by the credit of the U.S. government.
With a base venture necessity of just $1,000, and a greatest speculation of $5 million, they are
available by wide range of investor. As a rule, premium wage from Treasury bonds is excluded
from state and nearby salary charges. They are, in any case, subject to government salary
assessments, and a few segments of the arrival might be assessable at deal/development. The
fundamental defeat of T-bills is that they offer lower returns than numerous different
speculations, yet these lower returns are because of their okay. Investment that offer higher
returns generally comes with high risk

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Treasury Bills

Treasury Bills Issued by the Central Bank  

Issue Volume
Issue Number No. of Bonds Issue Date Maturity Date Interest (%)
(JD)
2011/8 75,000 75,000,000 17/03/2011 17/03/2012 3.729
2011/11 37,000 37,000,000 31/03/2011 31/03/2012 3.741
2011/13 56,000 56,000,000 18/04/2011 18/04/2012 3.844
2011/17 75,000 75,000,000 07/09/2011 07/03/2012 3.373
2011/18 50,000 50,000,000 25/09/2011 25/09/2012 3.829
2011/19 50,000 50,000,000 30/10/2011 30/04/2012 3.1
2011/20 50,000 50,000,000 14/11/2011 14/05/2012 2.972
2011/21 100,000 100,000,000 20/11/2011 20/11/2012 3.638
2011/22 81,000 81,000,000 27/11/2011 27/05/2012 3.001
2011/23 50,000 50,000,000 28/11/2011 28/05/2012 3.026
2011/24 50,000 50,000,000 04/12/2011 04/06/2012 3.099
2011/27 50,000 50,000,000 08/12/2011 08/06/2012 3.180
2011/28 50,000 50,000,000 11/12/2011 12/03/2012 2.824
2011/29 50,000 50,000,000 14/12/2011 14/03/2012 2.877

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The disadvantages of investing in T-bills
Subsequently, it is generally simple to feel sure when putting resources into U.S. Treasuries,
particularly for those nearing retirement and searching for a safe source of income
however , even with a portion of the preferences connected with putting resources into Treasury
bonds, there are still disadvantages to know about.

Putting resources into Treasury bonds may not generally give the best alternative to your
specific circumstance.

LOW YIELD ON TREASURY BILLS

One of the biggest disadvantages of investing in Treasury bills is the low yield. Because they
are considered safe (even with the recent U.S. credit downgrade to AA), bonds offer a low yield.

In many cases, especially in periods of high inflation, you might not even come out ahead. The
nature of Treasury bills means you will not get a very high yield. This means that, while T-bills
can be solid for providing income once you’ve amassed a nest egg, they aren’t going to do a lot
for you in terms of building that nest egg. They are better for capital preservation, and for a
safety net.

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 Commercial Paper

The world of fixed-income securities can be divided into two main categories. The capital
markets consist of securities with maturities of more than 270 days, while the money market
comprises all fixed-income instruments that mature in 270 days or fewer. Commercial paper
falls into the latter category and is a common fixture in many money market mutual funds. This
short-term instrument can be a viable alternative for retail fixed-income investors who are
looking for a better rate of return on their money.

Basic Characteristics

Commercial paper is an unsecured form of promissory note that pays a fixed rate of interest.
Large banks or corporations to cover short-term receivables and meet short-term financial
obligations, such as funding for a new project, typically issue it. As with any other type of bond
or debt instrument, the issuing entity offers the paper assuming that it will be in a position to pay
both interest and principal by maturity. It is seldom used as a funding vehicle for longer-term
obligations because other alternatives are better suited for that purpose.

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Commercial paper provides a convenient financing method because it allows issuers to avoid
the hurdles and expense of applying for and securing continuous business loans, and the SEC
does not require securities that trade in the money market to be registered. It is usually offered
at a discount with maturities that can range from one to 270 days, although most issues mature
in one to six months.

History of Commercial Paper

Commercial paper was first introduced over 100 years ago, when New York merchants began
to sell their short-term obligations to dealers that acted as middlemen. These dealers would
purchase the notes at a discount from their par value and then pass them on to banks or other
investors. The borrower would then repay the investor an amount equal to the par value of the
note.

Marcus Goldman of Goldman Sachs was the first dealer in the money market to purchase
commercial paper, and his company became one of the biggest commercial paper dealers in
America following the Civil War. The Federal Reserve also began trading commercial paper
along with treasury bills from that time until World War II to raise or lower the level of monetary
reserves circulating among banks.

Commercial Paper Markets

Commercial paper has traditionally been issued and traded among institutions in denominations
of $250,000, with notes exceeding this amount available in $1,000 increments. Financial
conglomerates such as investment firms, banks and mutual funds have historically been the
chief buyers in this market, and a limited secondary market for this paper exists within the
banking industry.

Wealthy individual investors have also historically been able to access commercial paper
offerings through a private placement. The market took a severe hit when Lehman Brothers
declared bankruptcy in 2008, and new rules and restrictions on the type and amount of
commercial paper that could be held inside money market mutual funds were instituted as a
result. Nevertheless, these instruments are becoming increasingly available to retail investors
through online outlets sponsored by financial subsidiaries.

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Commercial paper usually pays a higher rate of interest than guaranteed instruments, and the
rates tend to rise along with national economic growth. Some financial institutions even allow
their customers to write checks and make transfers online with commercial paper fund accounts
in the same manner as a cash or money market account. However, investors need to be aware
that these notes are not FDIC-insured. They are backed solely by the financial strength of the
issuer in the same manner as any other type of corporate bond or debenture. Standard &Poor’s
and Moody’s both rate commercial paper on a regular basis using the same rating system as for
corporate bonds, with AAA and Aaa being their highest respective ratings. As with any other
type of debt investment, commercial paper offerings with lower ratings pay correspondingly
higher rates of interest. But there is no junk market available, as commercial paper can only be
offered by investment-grade companies.

Rates and Pricing

The Federal Reserve Board posts the current rates being paid by commercial paper on its
website. The FRB also publishes the rates of AA-rated financial and non-financial commercial
paper in its H.15 Statistical Release every Monday at 2:30pm. The data used for this publication
are taken from the Depository Trust & Clearing Corporation (DTCC), and the rates are
calculated based on the estimated relationship between the coupon rates of new issues and
their maturities. Additional information on rates and trading volumes is available each day for
the previous day’s activity. Figures for each outstanding commercial paper issue are also
available at the close of business every Wednesday and on the last business day of every
month.

Types of commercial paper

The UCC identifies four basic kinds of commercial paper: promissory notes,
drafts, checks, and certificates of deposit. The most fundamental type of
commercial paper is a promissory note.

Another type is the Islamic commercial paper which is: issued (for maturities ranging
from 1 month to 12 months) and traded in the interbank market and may either be sold or
purchased at a discount, at par or premium to the face value.

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Advantages of commercial papers:

1) It is quick and cost effective way of raising working capital.

2) Best way to the company to take the advantage of short term interest fluctuations in the
market

3) It provides the exit option to the investors to quit the investment.

4) They are cheaper than a bank loan.

5) As commercial papers are required to be rated, good rating reduces the cost of capital for the
company.

6) It is unsecured and thus does not create any liens on assets of the company.

7) It has a wide range of maturity

8) It is exempt from federal SEC and State securities registration requirements.

Disadvantages of commercial papers:

1) It is available only to a few selected blue chip and profitable companies.

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2) By issuing commercial paper, the credit available from the banks may get reduced.

3) Issue of commercial paper is very closely regulated by the RBI guidelines.

Conclusion

As a result of the research, treasury bills are purchased by people who are averse and
willing not to lose their money, and since treasury bills’ term is less than commercial papers’
term then the profit as an output from treasury bills, it would be less than the profit as an
output from commercial papers and people who take risks purchase commercial papers
according to their level of interests, if they are willing to gain a lot of money they will face
higher risk.

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 References
http://www.forbes.com/sites/michaellingenheld/2015/10/09/the-riskreward-of-buying-
treasury-bonds-now/ - 70270ab34ca9

http://www.investopedia.com/terms/t/treasurybill.asp

http://www.forbes.com/sites/johntobey/2013/11/26/interested-in-caterpillar-make-use-of-
copper-coal-canada-correlation/#129801c21ec8

http://www.investopedia.com/articles/investing/070313/introduction-commercial-paper.asp

http://www.letslearnfinance.com/commercial-paper-and-its-features.html

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