Commercial paper

United States Commercial Paper 2001 to 2007 titles

United States Commercial Paper Weekly 2001 to 2008 titles small

Commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories, and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

Overview

Commercial paper is a very important funding source for many corporations. By issuing paper, the company is able to efficiently raise funds to support short term obligations. This type of financing is cheaper than a bank line of credit. The flexibility and relative simplicity of issuance make commercial paper an attractive option for strong credit-quality entities.

Issuance

The issuance of commercial paper involves large corporations offering short-term promissory notes to investors. These notes are backed only by the promise of the issuing corporation to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold in denominations of $100,000 or more. Therefore, individual investors rarely purchase commercial paper, which is predominantly a vehicle for institutional investors, money market funds, and banks.

Types of Commercial Paper

There are primarily two types of commercial paper: direct paper and dealer paper. Direct paper is sold directly by the issuer to the investor. Dealer paper is sold through intermediaries. A variation of commercial paper is asset-backed commercial paper (ABCP), which is secured by other financial assets.

Advantages and Disadvantages

Advantages

• Cost-effective and efficient way to raise short-term funds.
• Flexibility in terms of issuance size and maturity period.
• Does not require collateral, making the issuance process simpler.

Disadvantages

• Only available to companies with high credit ratings.
• Unsecured, and therefore, may carry a higher risk than secured loans.
• Relies on the smooth functioning of money markets.

Regulation

In the United States, the commercial paper market is regulated by the Securities and Exchange Commission (SEC) under the Securities Act of 1933. One of the main regulatory provisions is that commercial paper can only be issued with maturities of up to 270 days to avoid the necessity of registration with the SEC.

Market

The commercial paper market is a significant part of the money market and provides liquidity for corporations. It is a key component in the overall short-term borrowing and lending ecosystem, influencing interest rates and borrowing costs.

Conclusion

Commercial paper plays a crucial role in the financial markets by providing a convenient and cost-effective way for corporations to manage their short-term funding needs. Its importance in the money market underscores the need for a robust credit rating system and efficient market regulation.