What is Commercial Paper

May 30, 2010 - PRLog -- Commercial paper is an important element of the global money market. It is an unsecured promissory note that has a fixed maturity that can range anywhere from one day to 270 days. The denominations for CP cover a tremendously wide spectrum with a variety of different terms connected to them.

Commercial paper (CP) is defined as “a money-market security issued (sold) by large banks and corporations to get money to meet short-term debt obligations.” An example of CP would be payroll. CP is only backed by an issuing financial institution such as a bank or a corporation that has made a promise to pay the face amount on the note when the maturity date comes due.

Due to the fact that commercial paper is not backed up by collateral in any way it is only companies and firms that have excellent credit ratings from agencies with recognized ratings that are able to sell their CP at prices that are deemed reasonable. Most of the time commercial paper is sold at a discount from face value. CP comes with higher interest repayment dates than do bonds. In most cases the longer the maturity date there is on a note the higher the interest rate is that the issuer such as a bank or corporation is expected to pay. The interest rates for CP do fluctuate with the conditions of the market as do other types of investments. But on the other hand the interest rates on commercial paper are generally lower than the rates that banks offer.

To break it down into simpler terms, CP is an unsecured debt obligation that is issued to investors by banks and corporations for short-term financing reasons. It is most often used to finance such things as inventory costs as well as accounts receivable.

The secondary market when it comes to CP is very limited when it can be found at all. The vast majority of issuers of this kind of paper are companies and corporations that have high credit ratings. What this means is that the investment is almost always of a very low risk.

American law decrees that commercial paper is a financial tool that matures before 270 days (nine months) are up. The CP is used only to fund current assets such as receivables and inventories and operating expenses. On the other hand, it is not used and is not permitted to be used to fund fixed assets such as buildings, land or machinery. As long as the CP meets these qualifications it is not required to be registered with the U.S. Securities and Exchange Commission http://www.economywatch.com/finance/high-finance/commerci...

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