Commercial paper

Commercial paper is unsecured debt issued by a company, and which has a short maturity - in the range of one to 270 days. The duration of this debt is kept short in order to avoid the filing requirements of the Securities and Exchange Commission.

Commercial paper is typically issued when a company needs cash for short-term operating requirements, such as the replenishment of work capital. 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 of time.

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.