Commercial papers (CP) issued by brokerage firms have become popular in South Korea amid the high interest rate environment, with some products offering rates in the 5 percent range.

Investors looking to lock up short-term funds for less than a year are turning to CPs as their rates are more attractive than those of bank deposits and short-term bonds.

According to the securities industry on Monday, the outstanding balance of CPs at Korea’s four big brokerage firms reached 32.88 trillion won ($24.75 billion) in the second quarter this year, up 40.6 percent from 23.38 trillion won from a year ago.

The four firms are Mirae Asset Securities Co., Korea Investment & Securities Co., NH Investment & Securities Co., and KB Securities Co.

The supply has surged along with interest rates.

According to a report by Mirae Asset Securities, the interest rate on CPs ranged between 3.3 and 5.7 percent, up from 1.7~3 percent in the first half of last year.

A CP is a fixed-rate instrument with a maturity under one year that is issued by authorized investment banks with more than 4 trillion won in equity capital.

Brokerage firms normally issue CPs to raise funds and they have emerged as an attractive short-term investment among retail investors as high interest rates persist.

Currently, the annual interest rate of one-year CP offered by the four brokerage firms ranges from 4.15 to 4.4 percent, greater than the highest rate of 4.1 percent for a bank deposit product provided by Standard Chartered Bank Korea.

The interest rate on one-year Korean government bonds is also a mere 3.6 percent, making CPs an attractive product for short-term investments.

Some branches of brokerage houses are offering special promotional products with rates above 5 percent.

Recently, Korea Investment & Securities launched a 6-month CP product with an annual rate of 5.2 percent. KB Securities is also providing a 6-month bill at 4.5 percent and a 12-month bill at 5 percent to new and dormant customers from Monday thru September 27.

Promotional CP products are offered to attract additional funds from existing customers and new funds from new customers with slightly higher interest rates.

Such promotional products are usually offered in limited quantities on a first-come, first-served basis. They have high demand from individual investors as they allow billions of won per person in investment.

The maximum subscription limit per person for a recently sold bill was 2 billion won, and a one-year investment in the product generates about 88 million won in interest after interest income taxes.

The securities industry sees that funds are highly likely to flock to broker-issued CPs with relatively high interest rates as maturity approaches for short term, one-year products that were released with high interest rates amid rising market rates in the second half of last year. Currently, CP rates are at least a few percentage points higher than those of bank deposits and short-term bonds.

CPs offer interest at the promised rate with just one day of investment. The maturity can also be set freely according to investors’ preferences up to one year.

By Cha Chang-hee and Choi Jieun

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]