Commercial paper (CP) is an unsecured, short-term debt instrument issued by corporations to finance their immediate needs. It typically has a maturity period of up to 270 days and is usually issued at a discount from face value.
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Commercial paper is not backed by any collateral, making it an unsecured form of debt.
It is primarily used by companies with high credit ratings to meet short-term liabilities or working capital requirements.
The maturity period for commercial paper ranges from overnight to 270 days, but most commonly falls between 30 and 50 days.
Commercial paper is often issued at a discount and redeemed at face value upon maturity; the difference represents the interest earned.
The market for commercial paper is highly liquid, meaning that it can be quickly bought or sold in large volumes without significantly affecting its price.
Review Questions
What makes commercial paper an unsecured form of debt?
For how long can commercial paper be issued, and what is its usual range of maturity?
What type of companies typically issue commercial paper?
Related terms
Treasury Bills (T-Bills): Short-term government securities with maturities ranging from a few days to one year, sold at a discount.
Certificate of Deposit (CD): A time deposit offered by banks with a fixed interest rate and specified maturity date.
Corporate Bonds: Long-term debt securities issued by corporations to raise capital, typically secured by collateral or backed by the company's creditworthiness.