Commercial paper: Corporates issue commercial paper (CPs) to meet their short-term working capital requirements. Hence serves as an alternative to borrowing from a bank. Also, the period of commercial paper ranges from 15 days to 1 year. This money market product functions as a promissory note created by a business or organization to raise short-tern capital. It is an unsecured instrument, meaning there is no connected collaterals. Here are some key features of commercial paper:
· Short-term maturity: Commercial paper is a short-term debt instrument, typically maturing within a timeframe of 30 to 270 days, with most maturing much sooner. This makes it suitable for companies needing to bridge short-term funding gaps.
· Unsecured debt: Unlike bonds, which may be backed by collateral, commercial paper is unsecured. Investors rely on the creditworthiness and reputation of the issuing company to repay the debt. As a result, commercial paper is typically issued by companies with high credit ratings.
· High credit quality issuers: Due to the unsecured nature, only companies with a strong financial track record and a demonstrated ability to meet their obligations can issue commercial paper. This makes it a relatively low-risk investment for qualified investors.
· Discount of interest-bearing: Commercial paper can be issued at a discount or with a fixed interest rate. When issued at a discount, the investor purchases the note for less than its face value and receives the full-face value at maturity. Interest-bearing commercial paper pays a predetermined interest rate at maturity.
· Low-cost financing: Compared to other borrowing options like bank loans, commercial paper can be a cheaper source of financing for creditworthy companies, especially due to the shorter maturities and potentially lower interest rates.
In Summary, commercial paper is a flexible , short-term financing tool that offers advantages for both issuers and investors, including cost-effectiveness, high liquidity, and minimal interest rate risk, while relying heavily on the creditworthiness of the issuing corporation.