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COMMERCIAL PAPER  

Commercial Paper         
(Source: Thomas K. Hahn)

Characteristics of Commercial Paper
Market participants 
Risk in the Commercial Paper Market (Member section)
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    Backup Liquidity (Member section)
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    Default History and Yields (Member section)
Innovations (Member section)
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    Foreign Commercial Paper Markets  (Member section)
    The Growing Importance of Commercial Paper (Member section)
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Commercial paper is a short-term unsecured promissory note issued by corporations and foreign governments for many large, creditworthy issuers.  It is a low-cost alternative to bank loans. Issuers are able to efficiently raise large amounts of funds quickly and without expensive Securities and Exchange Commission (SEC) registration by selling paper, either directly or through independent dealers, to a large and varied pool of institutional buyers.  Competitive, market-determined yields in notes whose maturity and amounts can be tailored to specific needs, can be earned by investors in commercial paper.

Commercial paper has become one of America's most important debt markets, because of the advantages of commercial paper for both investors and issuers.  Commercial paper outstanding grew at an annual rate of 14 percent from 1970 to 1991.  Commercial paper totaled $528 billion at the end of 1991.

Characteristics of Commercial Paper 
Securities offered to the public must be registered with the Securities and Exchange Commission according to the Securities Act of 1933.  Registration requires extensive public disclosure, including issuing a prospectus on the offering.  It is a time-consuming and expensive process. Most commercial paper is issued under Section 3(a)(3) of the 1933 Act which exempts from registration requirements short-term securities as long as they have certain characteristics.

The exemption requirements have been a factor shaping the characteristics of the commercial paper market.  The following are requirements for exemption:
- The maturity of commercial paper must be less than 270 days. In practice, most commercial paper has a maturity of between 5 and 45 days, with 30-35 days being the average maturity. Many issuers continuously roll over their commercial paper, financing a more-or-less constant amount of their assets using commercial paper.  The nine-month maturity limit is not violated by the continuous rollover of notes, as long as the rollover is not automatic but is at the discretion of the issuer and the dealer. Many issuers will adjust the maturity to suit the requirements of an investor.

Notes must be of a type not ordinarily purchased by the general public. In practice, the denomination of commercial paper is large: minimum denominations are usually $100,000, although face amounts as low as $10,000 are available from some issuers.  Typical face amounts are in multiples of $1 million, because most investors are institutions.  I

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Recommended further reading:
Bonds 
Bankers Acceptance
Discounting of bank guarantees (BG's)  (Redeeming for cash or raising a credit line) 
Guarantees  
Introduction to Institutional Trading 
Introduction to Bank Debenture Trading Programs 
Zero Coupons and STRIPS

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