Commercial paper is usually issued at a discount from face value and reflects prevailing market interest rates. Commercial paper is not usually backed by any form of collateral , making it a form of unsecured debt. As a result, only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount higher cost for the debt issue.
Commercial paper - Wikipedia
Other corporations, financial institutions, wealthy individuals, and money market funds are usually buyers of commercial paper. A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission SEC as long as it matures before nine months, or days, making it a very cost-effective means of financing. Although maturities can go as long as days before coming under the purview of the SEC, maturities for commercial paper average about 30 days, rarely reaching that threshold.
The proceeds from this type of financing can only be used on current assets, or inventories, and are not allowed to be used on fixed assets , such as a new plant, without SEC involvement. The commercial paper market played a big role in the financial crisis that began in As investors began to doubt the financial health and liquidity of firms such as Lehman Brothers , the commercial paper market froze, and firms were no longer able to access easy and affordable funding.
Another effect of the commercial paper market freezing was some money market funds - substantial investors in commercial paper - "breaking the buck. An example of commercial paper is when a retail firm is looking for short-term funding to finance some new inventory for an upcoming holiday season. This interest rate can be adjusted for time, contingent on the number of days the commercial paper is outstanding.
Want to know more? Read Introduction To Commercial Paper.
Tools / Resources
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