Commercial paper is a debt instrument—that is, a PROMISSORY NOTE issued by large CORPORATIONs that are also financially strong. To minimize the risk associated with commercial paper, it is traded among only the largest, most financially stable corporations, MUTUAL FUNDS, INSURANCE companies, banks, and other large intermediaries. Commercial paper is unsecured and short-term, with maturities ranging from 30 to 270 days. For firms with large amounts of excess cash, commercial paper is a convenient, relatively risk-free way of earning interest on otherwise idle balances for short periods of time. For example, a corporation may be saving up for the payment of a cash DIVIDEND or seeking to retire a bond issue. This pool of cash can be profitably and conveniently invested for a short term via commercial paper. For the borrower, commercial paper is a relatively inexpensive source of short-term CAPITAL. The interest rate on commercial paper is always below the prime rate and, in recent years, has closely paralleled T-bill rates.
See also INTEREST RATES.