Welcome to the Investors Trading Academy talking
glossary of financial terms and events. Our word of the day is “Commercial Paper”
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.
Commercial paper is usually issued by companies with very high credit ratings. Because of
this, and because it generally matures in a very short period of time, commercial paper
tends to be a very low-risk investment. Most commercial paper is assessed by more than
one rating agency. The four primary agencies are: Moody’s, Standard & Poor’s, Fitch, and
Duff & Phelps. Although commercial paper is occasionally
issued as an interest-bearing note, it typically trades at a discount to its par value. In
other words, investors usually purchase commercial paper below par and then receive its face
value at maturity. The discount, or the difference between the purchase price and the face value
of the note, is the interest received on the investment. All commercial paper interest
rates are quoted on a discounted basis.