The following are debt instruments with shorter maturities, generally, than bonds.
- commercial papers,
- certificates of deposit,
- medium-term notes,
- acceptance credits.
Each are bearer securities negotiable by delivery. They are all debentures or acknowledgements of indebtedness in a wider sense.
Acceptance credit facilities may provide short term finance through acceptance of eligible bills. Bills are bills of exchange. Acceptance credit facilities may be provided by institutions whose acceptances are approved by as eligible for use in monetary operations.
Commercial paper is generally issued by high grade borrowers. It is based under covenant alone without credit support or security. Where it is securitized, collateral and security enhancements, may be provided.
Medium-term notes are also issued by high-grade entities. They may be guaranteed and/or secured.
Certificates of deposits are issued by credit institutions which accept deposits.
Debt may be redeemed by new debt issues on a rolling basis. Investors will not generally have obligations to take new debt issues. An issuer may have a standby credit facility on which it can draw in the event that it cannot place its issues on the debt market.
A committed program of debt issuance is the one that is underwritten. An underwriter is obliged to take up the new issue. A committed program is costly and carries risks for the underwriters.
Medium-term notes may be traded on stock exchanges. As with bonds a prospectus is required.
Commercial paper, certificates of deposit and bankers acceptances may be issued in dematerialized form. They may be settled through CREST and equivalent providers.
Issuers may enter placing agreements to place or use best endeavours to place the issued securities with investors. Securities may only be offered to the public when an approved prospectus has been made available or is alternatively exempt.
A prospectus is not usually prepared for CDs. They may be offered under an exempt offer below the threshold. CD is regulated in the same way as a banking deposit.
Commercial paper is a promise to pay the bearer the stated amount on the stated day. Payments are made gross without deduction of tax. The governing law and jurisdiction are provided for. Commercial paper may be issued at a discount with the return implied by a discounted face value.
Commercial paper may be in bearer negotiable form or dematerialized form settled through CREST. Eligible debt security forms entail a deed exercised in a pro forma CD form. The deed sets out the terms of issues. A notice of issue is made which sets out the terms of the particular issue.
Medium-term notes have a maturity of a year or more. Below that ,they are deemed commercial paper. Maturities may be up to five years and in some cases longer.
Medium-term notes are broadly similar to bonds. They promise to pay a specific amount together with coupons for interest payments. They are often negotiable instruments transferable by delivery; being bearer instruments.
Provision is made for payment of interest without deduction. Events of default and other restrictions are defined. The governing law and jurisdiction are provided for. They may not be offered to the public unless exempt or with a prospectus. They are generally offered to qualified investors.
Medium-term notes may be issued on a committed on uncommitted basis. They may be placed with investors. They may be part of an issue over a period of time. They may be issued under a global deed of covenant. The terms of issue may be standardized so as to reduce documentation on later issues. They may be held through clearing systems.
Medium-term notes may be listed on stock exchange. A prospectus may be required. There may be a base prospectus with information about the issuer supplemented by supplementary prospectuses for new issues.
Certificates of deposit are basic instruments evidencing a deposit. They deposit is repayable to the bearer of the certificate on a stated date. Where interest is payable, in the case of paper form certificates, it is presented, and payment is noted on the certificate. Interest may be fixed or floating. Fixed rates are generally annual. Floating rates are three to six months.
Institutions which accept deposits and issue CDs must be authorized as deposit taking institutions. Certificates of deposit may be in any currency. Maturities may be up to five years, and longer terms are possible.
Minimum denominations are generally £100,000 or equivalent in foreign currency in London rules. Put and call options may be provided for. A guarantee may be provided for with guarantor by a regulated institution.
Acceptance credits are trade finance providing short-term finance. An acceptance credit facility provides for acceptance of eligible bills. Eligible bills are bills of exchange under the Bills of Exchange Act meeting certain criteria.
Under an acceptance credit, the bank agrees to accept bills of exchange drawn on by the borrower when presented. The drawer draws the bill in accordance with the facility payable on a certain date. It is presented by the seller under the relevant transaction. It is presented for acceptance through a bank.
The bank accepts the bill. The accepting bank may discount the bill on the basis of the accepting bank’s credit. The drawer pays the acceptance bank funds for the amount of the bill to enable the bank to pay the bill on presentation. The drawer and accepting bank are liable on the bill. Lenders are subject to limits on the value of acceptances which they may have outstanding.
An eligible bank should not accept bills not meeting eligibility criteria. It must have adequate protections and controls to ensure bills are eligible.
In order to be acceptable, the acceptance must be for less than six months. Bills must not be drawn on a non-bank, part of the banking group. Acceptances where the drawer and the accepting bank have a common shareholding or controlled are not usually accepted.
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