The Effect of Central Bank Rate on Commercial Paper Yield for Companies Listed at Nairobi Securities Exchange

Abstract

Economic decisions are affected by asset prices and yields of which are influenced by designed Central bank actions. Following the reforms in financial sector in Kenya, the Bank rate has emerged as an important indicator for signalling the stance of monetary policy for the market and guiding the interest rates to the desired trajectory. Commercial Paper (CP) has evolved as an important source of resource mobilization by the corporate during last few years. Like other money market rates, CP rates are also influenced by the changes in the Bank rate. The main purpose of this research was to determine the effect of Central bank rate on commercial paper (CP) yield for firms listed on the Nairobi Securities Exchange. The study used descriptive research design to meet the objectives of the study. The population of this study was listed companies at the NSE that had issued CP between January 2007 and December 2016. There was no sampling because the population was small and finite, data collected for this research was quantitative and secondary in nature which was sourced from CMA, NSE database and Annual Audited Financial Statements of selected companies. Regression and correlation analysis were used to determine the nature and strength between commercial paper yield (dependent) and Central bank rate (independent variables). The study found an insignificant positive and negative relationship between the central bank rate (CBR), Treasury bonds redemption yield (BRY) and the commercial paper yield (CPY) respectively. The study also found a positive and significant relationship between Treasury bill rate (TBR) the commercial paper yield (CPY). The study concluded that that the commercial paper yield for companies listed on the NSE is not significantly influenced by the central bank rate. The study recommended that the managements of firms listed on the NSE should enhance the usage of commercial paper by firms since their yield is not affected by the central bank rate.