Commercial paper is a short-term, unsecured debt instrument issued by large corporations and financial institutions to raise capital for short-term financing needs such as payroll, accounts payable, and inventory purchases
. It is typically issued in minimum denominations of $100,000 and has maturities ranging from 1 to 270 days, with an average maturity of about 30 days
. Key characteristics of commercial paper include:
- It is unsecured, meaning it is not backed by collateral but rather the issuer's creditworthiness
- It is issued at a discount to its face value and matures at par, with the difference representing the investor's return
- It is usually issued by firms with high credit ratings to ensure investor confidence and lower borrowing costs
- It serves as an alternative to bank loans for short-term funding needs, often exempt from SEC registration if maturity is less than 270 days
Commercial paper is primarily bought by institutional investors such as mutual funds, insurance companies, corporations, and government entities due to its large denomination and short maturity
. In summary, commercial paper is a negotiable, unsecured promissory note used by corporations to efficiently finance their short-term liabilities without the need for collateral or lengthy loan processes
