"backup". Banks often charge fees for the amount of the line of the credit that does not have a balance, because under the capital regulatory regimes set out by the Basel Accords, banks must anticipate that such unused lines of credit will be drawn upon if a company gets into financial distress. They must therefore put aside equity capital to account for potential loan losses also on the currently unused part of lines of credit, and will usually charge a fee for the cost of this equity capital. Advantages of commercial paper: High credit ratings fetch a lower cost of capital. Wide range of maturity provide more flexibility. It does not create any lien on asset of the company. Tradability of Commercial Paper provides investors with exit options. Disadvantages of commercial paper: Its usage is limited to only blue chip companies. Issuances of commercial paper bring down the bank credit limits. A high degree of control is exercised on issue of Commercial Paper. Stand-by credit may become necessary Commercial paper yields Like treasury bills, yields on commercial paper are quoted on a discount basis—the discount return to commercial paper holders is the annualized percentage difference between the price paid for the paper and the face value using a 360-day year. Specifically, where is the discount yield, is the face value, is the price paid, and is the term length of the paper in days: and when converted to a bond equivalent yield (): Defaults Defaults on high quality commercial paper are rare, and cause concern when they occur. Notable examples include: On June 21, 1970, Penn Central filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code and defaulted on approximately $77.1 million of commercial paper. This sparked a runoff in the commercial paper market of approximately $3 billion, causing the Federal Reserve to intervene by permitting commercial banks to borrow at the discount window. This placed a substantial burden on clients of the issuing dealer for Penn Central’s commercial paper, Goldman Sachs. On January 31, 1997, Mercury Finance, a major automotive lender, defaulted on a debt of $17 million, rising to $315 million. Effects were small, partly because default occurred during a robust economy. On September 15, 2008, Lehman Brothers caused two money funds to break the buck, and led to Fed intervention in money market funds. In case of default, the issuer of commercial paper (large corporate)