What is Commercial Paper?

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.

Who Issues Commercial Paper?

Because there is no collateral on commercial paper, it is only an option for large companies with high-level credit ratings from a recognized credit rating agency.

Advantages of Commercial Paper

For those companies capable of issuing it, the interest rate on commercial paper is extremely low. Another advantage is that the risk of default is quite low, given that only the largest and most financially stable organizations issue it. A further advantage for issuers is that no registration is required; this greatly reduces the cost of issuance.