From Wikipedia, the free encyclopedia

Securities

Securities Bond Equities Investment Fund Derivatives Structured finance Agency Securities

Markets Bond market Stock market Futures market Foreign exchange market Commodity market Spot market Over-the-counter Market (OTC)

Bonds by coupon Fixed rate bond Floating rate note Zero coupon bond Inflation-indexed bond Commercial paper Perpetual bond

Bonds by issuer Corporate bond Government bond Municipal bond Sovereign bond

Equities (Stocks) Stock Share IPO Short Selling

Investment Funds Mutual fund Index Fund Exchange-traded fund (ETF) Closed-end fund Segregated fund

Structured Finance Securitization Asset-backed security Collateralized debt obligation Collateralized mortgage obligation Credit linked note Mortgage-backed security Unsecured bond Agency Securities

Derivatives Options Warrants Futures Forwards Swaps Credit Derivatives Hybrid Securities

edit this box

Commercial paper is a money market security issued by large banks and corporations. It is generally not used to finance long-term investments but rather for purchases of inventory or to manage working capital. It is commonly bought by money funds (the issuing amounts are often too high for individual investors), and is generally regarded as a very safe investment. As a relatively low risk option, commercial paper returns are not large. There are four basic kinds of commercial paper: promissory notes, drafts, checks, and certificates of deposit.

Because commercial paper maturities don't exceed nine months and proceeds typically are used only for current transactions, the notes are exempt from registration as securities with the United States Securities and Exchange Commission.

Commercial paper is defined in Canada as having a maturity of not more than one year and is exempt from dealer registration and prospectus requirements.^[1]

Commercial paper essentially can be compared as an alternative to lines of credit with a bank. Once a business becomes large enough, and maintains a high enough credit rating, then using commercial paper is always cheaper than using a bank line of credit. Nevertheless, many companies still maintain bank lines of credit to act as a "backup" to the commercial paper. In this situation, banks often charge fees for the amount of the line of the credit that 'doesn't' have a balance. While these fees may seem like pure profit, if the company ever actually needs to use the line of credit it would likely be in serious trouble and have difficulty paying it back.

Currently more than 1,700 companies in the United States issue commercial paper. Financial companies comprise the largest group of commercial papers issuers, accounting for nearly 75 percent of the commercial paper outstanding at mid-year 1990. Financial-company paper is issued by firms in commercial, savings and mortgage banking; sales, personal and mortgage financing; factoring; finance leasing and other business lending; insurance underwriting; and other investment activities. The remaining commercial paper outstanding at mid-year 1990 -- over 25 percent -- was issued by nonfinancial firms such as manufacturers, public utilities, industrial concerns and service industries.

Contents 1 Issuing Commercial Paper 2 Who Buys Commercial Paper 3 Notes and References 4 External links

There are two methods of issuing paper. The issuer can market the securities directly to a buy and hold investor such as most money funds. Alternatively, it can sell the paper to a dealer, who then sells the paper in the market. The dealer market for commercial paper involves large securities firms and subsidiaries of bank holding companies. Most of these firms also are dealers in US Treasury securities. Direct issuers of commercial paper usually are financial companies which have frequent and sizable borrowing needs, and find it more economical to sell paper without the use of an intermediary. In the United States, direct issuers save a dealer fee of approximately 3 basis points annualized (1 basis point equals 1/100th of 1%), or $30,000 on every $100 million annualized outstanding. This saving compensates for the cost of maintaining a permanent sales staff to market the paper. Outside the United States, dealer fees are rather lower.

Money Funds are large buyers of Commercial Paper.

1. ^ Ontario Securities Commission National Instrument 45-106 (Section 2.35) Accessed 2007-01-30

• CP Daily - Premium provider of research and searchable databases relating to global CP and ECP markets.
• Federal Release System on commercial papers
• Commercial paper - Encyclopedic entry
• Money market mutual fund information.