Commercial paper

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Commercial paper

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

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.

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.

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.

References in periodicals archive ?
Corporate issuers of commercial paper typically fall into two groups: financial and nonfinancial firms.
Investors in commercial paper are primarily money market mutual funds, trust funds, insurance companies, pension funds, and large firms with extra cash to invest.
Commercial paper has been issued for a long time and has been regulated since the passage of the Securities Act of 1933.
Commercial paper has been rated by rating agencies since the early 1970s, after the default of the Penn Central railroad in 1970.
In practice, it is imperative for a commercial paper issuer to have a backup line of credit, usually from banks with the highest credit ratings.
Asset-backed commercial paper is excluded from the above discussion and from the consideration in the text because it is fundamentally different from traditional commercial paper.
The commercial paper market is generally accessible only to companies with very high credit quality, as only such companies can find buyers for their commercial paper.
For example, if an issuer's credit quality deteriorates and is downgraded from the top tier to the second tier, even though the default risk in its commercial paper is still minuscule, many previous investors may refuse to roll over the issuer's maturing commercial paper.
In the aggregate, if deterioration in the credit quality of companies in the highest credit tier is widespread, the size of the commercial paper market will decline quickly.
The Appendix Chart provides evidence that the average interest rate on 30-day commercial paper appears to follow the federal funds rate closely, and the spread between the two rates seems to have little relation to credit quality.
Two schools of thought offer explanations for why very high-quality commercial paper dominates the market.

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