Commercial Paper

Commercial paper typically matures within a few days to several months, rarely more than a year. It is usually issued at a discount to its face value, so the investor's return comes from receiving the full face value at maturity.

For example, a company might issue commercial paper with a face value of 1,000,000, maturing in 90 days, selling it to investors for 990,000. At maturity, investors receive 1,000,000, a return of 10,000.

Because commercial paper is unsecured, only companies with strong credit ratings can issue it at attractive rates. Buyers include money market funds, other companies and institutional investors looking for safe, short-term places to put cash.

Commercial paper is often cheaper than bank loans for highly rated companies. However, the market can dry up during periods of financial stress, as happened during the 2008 financial crisis and in early 2020, when central banks intervened to support it. Companies issuing commercial paper often maintain backup credit lines with banks in case they cannot roll over their paper when it matures.