Commercial Paper
A short-term unsecured debt instrument issued by corporations to meet near-term working capital needs.
What is Commercial Paper?
Commercial paper is a short-term, unsecured promissory note issued by large, creditworthy corporations and financial institutions to raise cash for near-term working capital needs such as payroll, inventory, and accounts payable. It typically matures in 1 to 270 days (beyond 270 days would require SEC registration) and is issued at a discount to face value, with the difference representing the investor's return. Because it is unsecured, commercial paper is generally only accessible to highly rated issuers (A-1/P-1 or better), making it a key indicator of short-term credit conditions. Money market funds are the primary buyers. During financial crises, the commercial paper market can seize up, as occurred in September 2008 when the Federal Reserve established the Commercial Paper Funding Facility (CPFF) to restore liquidity.
Example
Apple Inc. regularly issues commercial paper to manage working capital between its quarterly cash flows. In Q1 2024, Apple had $10 billion in commercial paper outstanding, issued at rates near the 3-month Treasury bill yield plus a small spread — far cheaper than a revolving bank credit line. Investors, primarily money market funds, accept the minimal credit risk in exchange for slightly higher yields than Treasury bills.