Commercial paper (CP) is a type of unsecured, short-term debt instrument issued by corporations, financial institutions, and other large organizations to raise capital. CP is typically issued for a period of between one and 270 days, although the majority of CP matures in less than 90 days.
CP is considered to be a relatively safe investment because it is issued by creditworthy organizations with a strong credit rating. The interest rate paid on CP is typically lower than other short-term debt instruments, such as Treasury bills, but higher than the rate paid on bank deposits.
CP is usually sold in large denominations, typically $100,000 or more, and is typically bought by institutional investors such as money market funds, insurance companies, and pension funds. Retail investors can also invest in CP through mutual funds that specialize in short-term debt instruments.
CP is often used by corporations to meet their short-term financing needs, such as funding payroll, inventory purchases, and accounts receivable. Financial institutions also issue CP to fund their operations and provide liquidity to their balance sheets.
CP is typically issued through a dealer or broker, who takes a commission for their services. The market for CP is known as the commercial paper market, which is an important source of short-term funding for corporations and financial institutions.
CP is regulated by the Securities and Exchange Commission (SEC), which requires issuers to disclose certain information about their financial condition, credit rating, and the terms of the CP. The SEC also requires issuers to file periodic reports with the agency, which are available to the public.
Overall, CP is a short-term debt instrument that provides corporations and financial institutions with a way to raise capital quickly and at a lower cost than other debt instruments. It is also considered to be a relatively safe investment because it is issued by creditworthy organizations with a strong credit rating.