No, this term doesn't refer to an advertisement for toilet tissue (that would be Backed Asset Paper Commercial), and it doesn't designate a humorous procession up a mountain featuring bagpipes and a bunch of pastries (that would be a Comical Piper Baked Ascent, which frankly isn't even close, unless you have both dyslexia and a massive speech impediment).
Instead, this is commercial paper that has some asset providing it with collateral. Got it? No, didn't think so. We figured that definition would probably require a bit more of a break down.
First, commercial paper. Typically, this term refers to a short-term debt security. Basically, a company is borrowing money from investors and the commercial paper acts as the I.O.U. Often, this paper is unsecured, meaning that investors have no recourse if the company defaults. But the chance of default are low, because the time limit is so short. It's like your buddy borrowing 20 bucks from you to go to the movies, with the promise that he'll pay you back next week. Except it's on a corporate level, so we could be talking about millions of dollars of corporate paper.
Asset backed corporate paper goes the additional step of adding collateral. Usually, the asset back-stopping the paper is something like credit card or auto loan receivables. Since they are short-term, the maturity dates of the asset backed commercial paper are no more than 270 days.
For the issuer, selling the asset backed securities generates short-term capital to cover immediate expenses and smooth out the business cycle, similar to how companies will use a line of credit.
For investors, the prospect is usually relatively safe, because the maturity dates come soon enough that there isn't a big chance of a surprise default (hopefully, you can trust a company to stay in business for the next 9 months). Plus the investors' cash is only tied up for a brief period of time, and the interest rate is likely higher than something like a money market.
Related or Semi-related Video
Finance: What is Collateralized Mortgage...65 Views
Finance a la shmoop what is a collateralized mortgage obligation or
CMO all right people well this is a GMO and this is a CMO yeah it's a bunch of
mortgages in one investment vehicle pot like mortgage Stone Soup not nearly as [Mortgage stones in a bowl of soup]
exciting is that that man-eating plant over there
so yeah just a bunch of mortgages that are packaged together when banks and
investors package mortgages together well they can treat them like they're a
big fat indexed bond fund because these groups of mortgages while they pay
interest ie the interest comes from the people who are actually paying off their
mortgages so why would you collateralize a mortgage obligation anyway answer risk
by packaging lots and lots of mortgages together the theory was that well as a [CMO boxes on a conveyor belt]
whole they would create a much less volatile environment than the former
alternative of having tens of thousands of individual mortgages many of which at
any given time were you know in do rest as people were dead beating and not [Man playing video games]
paying what they promised to pay back right well collateralizing this group
meant simply placing all of them into one investment vehicle that could be
bought and sold as if it were in ETF or individual closed end fund but Wall
Street being Wall Street where greed is good until it's not abused the notion of [Boxing gloves punch collateralized]
collateralized mortgages and actually applied the notion of collateral against
them pledging as collateral the equity in these mortgages or packages of
mortgages and then borrowing against them so it's like leverage on leverage,
highly volatile and this is sort of like the brilliant idea of the fraternity [Man walking along]
social chairman sending the pledges to get graham crackers marshmallows and
chocolate when he sees his you know couch is on fire yeah like why wouldn't [People carrying snacks and a couch on fire appears]
he just put it out like what was he imbibing there all right well in fact
this is more or less what happened in the mortgage meltdown of 2008 and 9 and
it was helium inside of the couch that exploded in the form of many of these [Helium explodes on a couch]
mortgages becoming insolvent and as one mortgage went bad
well it caused a chain reaction of panic up and down the economic food chain
which resulted in the near bankruptcy of the United States financial system
basically the people who pulled together these CMOS forgot what the O stands for [Man walking along the street and plant eats him]
oh dear, oh my
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