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.
APPENDIX 2: THE QUANTITY RESPONSE OF THE COMMERCIAL PAPER MARKET AND THE "ORDERLY EXIT" MECHANISM
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.