commercial paper - Issuing Commercial Paper

A short-term negotiable instrument for payment of money, such as a bill of exchange. In the USA the term is used to describe a short-term note (between four and twelve months) issued by a company with a very high credit-rating.

Commercial paper is a money market security issued by large banks and corporations. 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 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 then using a bank line of credit. Nevertheless many companies still maintain bank lines of credit to act as a "backup" to the commercial paper.

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; 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.

Issuing Commercial Paper

There are two methods of issuing paper. Alternatively, they 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. 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.