- Commercial paper is a short-term money market asset that consists of a promissory note with a pre-determined maturity.
- It is a certificate that represents an unsecured business loan with a short maturity date.
- It is possible to issue commercial paper in interest-bearing form, although it is often issued at a discount rate to face value.
- The issuer promises to pay the buyer a defined sum at some point in the future but pledges no assets to support that commitment, just his liquidity and established earning potential.
- A company can issue commercial paper directly to investors or via banks or merchant banks. Commercial paper cannot be converted into stock in the issuing firm since it is non-convertible.
- As it is not backed by collateral, it is classified as unsecured debt. Investors make investments based on the company’s financial strength and capacity to generate revenue.
Commercial Paper : Features and Types