See Also:
Convertible Debt Instrument
NonInvestment Grade Bonds
Collateralized Debt Obligations
External Sources of Cash
Certificate of Deposit (CD)
What Your Banker Wants You To Know
Commercial Bank
Convertible Debt Instrument
Commercial Paper Definition
Commercial paper is a short-term debt instrument. Companies can borrow money by issuing it to investors.
It is unsecured, meaning collateral does not back it up. Values range from $25,000 and up. Furthermore, the typical value is $100,000. Maturities range from 2 days to 270 days, and the typical maturity is 30 days. As long as the maturity is less than 270 days, you do not have to register the debt with the SEC. It is often issued at a discount from par value, issued with interest payments, or both. Credit rating agencies rate commercial paper.
When to Issue Commercial Paper
Companies that issue commercial paper are typically large corporations with good credit. They issue it because the debt instruments have flexible maturities. They are also usually cheaper than bank loans. Finance the current assets and short-term obligations using the proceeds. Then issue it directly to investors or via a dealer.
Investors that invest in commercial paper, usually large-scale institutional investors such as mutual funds, consider it issued by a creditworthy corporation to be a safe investment. However, the returns earned on it are low.
