Definition: Commercial paper is unsecured debt that is issued by an entity, and which has a fixed maturity ranging from one to 270 days. A company uses commercial paper to meet its short-term working capital obligations. It is commonly sold at a discount from face value, with the discount (and therefore the interest rate) being higher if the term is longer. A company can sell its commercial paper directly to investors, such as money market funds, or through a dealer in exchange for a small commission.
Because there is no collateral on the debt, commercial paper is only an option for large companies having high-level credit ratings from a recognized credit rating agency. For those companies capable of issuing it, the interest rate on commercial paper is extremely low.