Setup Menus in Admin Panel

Sharing the Knowledge!™

Finance Knowledge and Information

What is commercial paper?


Commercial paper (CP) is a negotiable, unsecured typically straight discount bearer money market instrument with a maturity of less than one year, usually issued by large nonbank corporations with an excellent credit rating.  Commercial paper issued in the United States by domestic corporations (USCP) has a maximum maturity of 270 day to qualify for SEC-registration exemption, with most having a maturity of up to 80 days.

The interest rate on CP is lower than bank lending rates for the issuer, which makes paper an attractive alternative to bank credit for raising funds.

US Fed Criteria for CP Interest Rate Indexes
1. The credit rating agencies
2. The credit rating reviews
3. SEC registration types
4. Placement
5. Excluded trades
6. Weights
Source: Board of Governors of the Federal Reserve System

The issue size of CP ranges from $100,000 to $1 billion and are targeted to institutional investors.  The minimum denomination of USCP is traditionally $100,000, but is commonly $250,000 and $500,000.  Because of their large size, private investors have limited access to commercial paper.

Commercial paper is issuer-driven, with issuers tapping the market whenever the funding is needed.  Whereas CP is traditionally issued by companies for the funding of their working capital requirements, it is also used as bridge financing for plant and equipment expenditure and corporate acquisition financing.

The secondary market in CP is generally limited due to the short-term maturity of paper and since the maturity of paper is typically matched to investor needs and usually held until maturity.  In the event an investor wishes to liquidate paper prior to maturity, the issuer or selling dealer will normally buy it back.

© 2015-2020 Pecunica LLC.  All rights reserved.