Friday, September 18, 2009

What is Commercial Paper?

Commercial Paper

Commercial paper is a tool of debt, or otherwise known as a 'debt instrument,' whereby a solid company will issue the debt for short-term capital needs. A lot of money market mutual funds will invest in commercial paper as part of their investing strategy for safe, solid returns over the short term.

When issuing the debt, a company will have to pay the money out at a specific day they've instituted as part of the investment, normally from between two to 270 days.

The general practice of commercial paper is to be sold at a discount, and so is used by companies to aid them in managing their short-term capital flows.

Similar to a money market fund, investors will use commercial paper to put their money they're not going to use in the immediate future, as it's very safe, and it's very easy to get your money out when you want or need it.

Not only is it very safe investment because the companies issuing the commercial paper have very high credit ratings, but also because it is backed up by lines of credit from banks, making it extremely safe. The result for investors is also low yields, which the safety of commercial paper offers.

Commercial Paper

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