Yield Differentials - Admission/Application Essay Example

There are different types of yield depending upon the nature of the security or the bond. For example, the bond has four types of yields: current yield, dividend yield, yield to maturity and tax equivalent yield. Commercial paper is a short-term promissory note that is unsecured and is usually issued by the corporations and foreign governments. Commercial paper is a low cost alternative to bank loans for large issuers with strong credit backing. The issuance of commercial paper can be done in two ways: direct issue or dealer issue.

In the first method, the paper is issued by the corporation directly to the investors whereas in the latter an agent or a bank is involved as the intermediary for the issuance of commercial paper. Since commercial paper is a short term note, the earnings or the yield are determined by the market where the maturity and the amount of the paper can be tailored to the specifics of the investor. The commercial paper is issued at a discount rate to its maturity value. Therefore, the difference between the maturity price and the purchase price is the yield or the earnings of the investor.

The note is quoted on the basis of discount yield which is a function of short-dated yield curve. The maturity of the paper is usually 270 days. As the default risk on the note is higher than other bills such as Treasury bill, the yield on commercial paper is higher. This default risk also creates the differential between different commercial papers’ grade and rates. The yield rate is also higher than that of certificate of deposit (CD) due to low liquidity of the paper. The higher yield on the paper reflects the poor liquidity of the instrument.

In the simplest term, certificate of deposit is a receipt given by the banks for the deposits that have been placed with them. The deposits have a LIBOR fixed rate of interest as well