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Commercial Paper

Commercial Paper is a short-term, unsecured debt instrument issued by corporations to meet short-term financing needs, such as funding payroll, accounts payable, or inventory. It typically has a maturity of less than 270 days and is issued at a discount to face value. Since commercial paper is unsecured, only companies with strong credit ratings can issue it at favorable rates. Commercial paper is widely used as a low-cost financing tool and is typically purchased by institutional investors like money market funds.

Example

A large corporation might issue $10 million in commercial paper with a 90-day maturity to fund its short-term operating expenses, offering a slight discount to the face value.

Key points

• Commercial Paper is a short-term, unsecured debt instrument used by corporations to finance short-term obligations.

• It is typically issued at a discount and has a maturity of less than 270 days.

• Only companies with strong credit ratings can issue commercial paper at favorable rates.

Quick Answers to Curious Questions

It provides corporations with a low-cost, short-term financing option to meet immediate funding needs, such as payroll, accounts payable, or inventory purchases.

Institutional investors, such as money market funds and large corporations, typically buy commercial paper due to its short-term nature and relatively low risk.

Since it is unsecured, the primary risk is that the issuing corporation defaults on its repayment. However, this risk is mitigated by the fact that only highly-rated companies typically issue commercial paper.