Commercial paper consists of short-term, unsecured promissory notes issued by corporations for specific amounts and with specific maturity dates.
- Overview
- Characteristics
Many companies issue commercial paper to raise cash needed for current transactions, with many finding it to be a less costly alternative to bank loans. Investors can take advantage of commercial paper because it may be sold at a discount rate or may be interest-bearing. Terms can be as short as one day and do not exceed 270 days.
Commercial paper offerings are evaluated by key credit rating agencies. Agencies take into consideration the corporation’s financial status, resources and competitive position within its industry. For commercial paper to make investment grade, it must have a rating of A1, A2 or A3 from Moody's and P1, P2 or P3 from Standard & Poor's (S&P).
Safety
Commercial paper offerings are evaluated by key credit-rating agencies. A fairly liquid secondary market allows investors to sell or trade commercial paper offerings. The market price is dependent upon the fluctuation of interest rates, as it is with any fixed-income security.
Yield
The commercial paper secondary market provides access to maturities up to 270 days, but usually greater than 30 days.
Diversity
Issues are offered with numerous terms and structures to meet your investment needs. Commercial paper offerings are available in an assortment of credit qualities and maturities. Commercial paper notes are issued with short-term maturities that do not exceed 270 days. The commercial paper secondary market provides access to maturities greater than 30 days.
Limitations
An element of risk exists because commercial paper is an unsecured, promissory note made by the issuing corporation. Commercial paper does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days), making it a very cost-effective means of financing for the issuers with high-quality credit.
Short-term promissory notes either unsecured or backed by assets such as loans or mortgages issued by a corporation. The maturity of
commercial paper is typically less than 270 days; the most common maturity range is 30 to 50 days or less.Commercial paper
Commercial Paper
An unsecured, short-term debt security issued by a corporation. Commercial paper is usually issued at a discount from par, and is a popular investment with mutual funds. It usually is issued in large denominations (over $250,000) and has a maturity of less than 270 days, with most maturing within one or two months of issue. It is a highly liquid investment and forms part of the money market. It is often simply called paper.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
commercial paper
A short-term unsecured promissory note issued by a finance company or a relatively large industrial firm. The notes are generally sold at a discount from face value with maturities ranging from 30 to 270 days. Although the large denominations ($25,000 minimum) of these notes usually keep individual investors out of this market, the notes are popular investments for money market mutual funds. Used interchangeably with the term paper. See also prime paper.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
Commercial paper.
To help meet their immediate needs for cash, banks and corporations sometimes issue unsecured, short-term debt instruments known as commercial paper.
Commercial paper usually matures within a year and is an important part of what's known as the money market.
It can be a good place for investors -- institutional investors in particular -- to put their cash temporarily. That's because these investments are liquid and essentially risk-free, since they are typically issued by profitable, long-established, and highly regarded corporations.
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