Commercial Bills & T-Bills

Commercial Bills & T-Bills

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Treasury bills and commercial bills are both types of financial instruments that are commonly traded in the money market. While both types of bills are used by businesses and investors to manage their cash flow, they differ in their purpose, risk, maturity period, and trading characteristics.

Treasury bills, also known as T-bills, are issued by the government to finance its operations. They are short-term debt instruments that mature in less than a year, typically three, six, or twelve months. Commercial bills, on the other hand, are issued by businesses to finance their operations. They are also short-term debt instruments that mature in less than a year, typically between 30 and 90 days. An important characteristic is the risk associated with these bills. Commercial bills risk is more compared to T-bills because they are not backed by the government, and their repayment is dependent on the creditworthiness of the issuer. The risk of default by the issuer is the main risk associated with commercial bills.

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Commercial bills maturity period can vary depending on the needs of the issuer. They can be issued for as little as 30 days or as long as 90 days. This flexibility allows businesses to tailor their financing needs to their cash flow requirements. Shorter-term commercial bills are usually issued to finance working capital needs, while longer-term bills are used for capital expenditures.

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Commercial bills in money market are traded frequently as they help and support short-term financing. In the money market, commercial bills are bought and sold at a discount to their face value, meaning that the buyer pays less than the face value of the bill, and the seller receives less than the face value of the bill. The difference between the purchase price and the face value of the bill represents the return to the investor and this is where the profit is accrued.

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The both treasury bills and commercial bills are short-term financial instruments that are used to manage cash flow. The maturity period of commercial bills can vary depending on the needs of the issuer, and they are traded in the money market at a discount to their face value. Understanding the characteristics of both types of bills is important for investors and businesses looking to manage their cash flow and investments effectively.