How to Calculate Commercial Paper

Calculating commercial paper involves determining its discounted value, maturity value, and effective yield. Here’s a simple step-by-step guide:

1. Determine the Key Inputs:

   • Face Value (FV): The amount to be paid at maturity.
   • Discount Rate (DR): The annual rate at which the CP is discounted.
   • Time to Maturity (T): The number of days or months until maturity.

2. Use the Discount Formula:

   Discounted Value=FV×(1−DR×T360)\text{Discounted Value} = FV \times \left(1 – \frac{\text{DR} \times T}{360}\right)Discounted Value=FV×(1−360DR×T​)

   This gives you the price at which the CP is issued or bought.

3. Calculate the Yield:
   The yield measures the return on the investment and is calculated as:

   Yield=Maturity Value−Purchase PricePurchase Price×100\text{Yield} = \frac{\text{Maturity Value} – \text{Purchase Price}}{\text{Purchase Price}} \times 100Yield=Purchase PriceMaturity Value−Purchase Price​×100

For example, if a ₦1,000,000 CP has a discount rate of 10% and matures in 90 days:

• Discounted Value: ₦1,000,000 × (1−0.10×90360)(1 – \frac{0.10 \times 90}{360})(1−3600.10×90​) = ₦975,000.
• Yield: ₦1,000,000−₦975,000₦975,000×100=2.56%\frac{₦1,000,000 – ₦975,000}{₦975,000} \times 100 = 2.56\%₦975,000₦1,000,000−₦975,000​×100=2.56%.

What Is the Rate of a 1-Month Commercial Paper?

The rate of a 1-month commercial paper varies based on:

• Market Conditions: Demand and supply in the financial market.
• Issuer’s Creditworthiness: Companies with higher credit ratings typically offer lower rates.
• Central Bank Policies: Interest rates set by the Central Bank of Nigeria (CBN) influence CP rates.

As of recent trends, 1-month commercial paper rates in Nigeria typically range from 9% to 15% per annum, depending on the issuer and economic conditions. Always check the latest rates from banks, financial institutions, or CP issuers.

Why Is Commercial Paper 270 Days?

Commercial papers are limited to 270 days (or less) due to regulatory requirements:

1. Avoiding SEC Registration: Issuers of commercial papers with maturities longer than 270 days must register them as securities with the Securities and Exchange Commission (SEC), which involves more costs and regulations.
2. Short-Term Nature: Commercial papers are designed for short-term financing needs, such as working capital, which typically doesn’t exceed 270 days.
3. Market Liquidity: Shorter maturities ensure higher liquidity and flexibility for investors.

Issuers and investors can benefit from quicker access to funds and fewer regulatory hurdles by adhering to this limit.

How to Invest in Commercial Papers in Nigeria

Investing in commercial papers in Nigeria is relatively straightforward. Here’s how you can get started:

1. Research and Identify Issuers:
   Look for credible companies issuing CPs. The FMDQ Securities Exchange is a good place to start as it lists approved CP programs in Nigeria.

2. Contact Your Financial Institution:
   Many commercial banks and stockbrokers in Nigeria offer CP investment options. You can inquire about available CPs and their rates.

3. Assess the Terms:
   Review the details, such as:

   • Discount rate.
   • Maturity period.
   • Credit rating of the issuer.

4. Open an Investment Account:
   If you don’t already have one, open an account with a financial institution or investment firm that facilitates CP transactions.

5. Place Your Order:
   Based on your budget and financial goals, decide how much you want to invest and submit your order.

6. Monitor Your Investment:
   Keep track of your CP maturity date to receive the full face value upon maturity.