Commercial Paper

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Commercial paper is unsecured debt issued by a company, and which has a short maturity - typically in the range of one to 270 days.

Commercial paper is typically issued when a company needs cash for short-term operating requirements. Commercial paper is sold at a discount from its face value. The discount at which it is sold is larger for longer-term instruments, since a larger interest rate is needed to attract investors for a longer period.

A company wishing to sell commercial paper can do so directly to investors, usually to larger ones that can buy up large amounts of debt, such as money market funds. A dealer may assist in selling the commercial paper in exchange for a commission.

Commercial paper does not require any collateral, so investors usually only consider it an acceptable form of investment when the issuer is a large entity that has been awarded a high credit rating. If the issuing entity meets these criteria, it can usually issue the debt for a low interest rate.