High returns with flexibility
Commercial paper is an unsecured short-term debt issued in the money market by financial and commercial companies. It is generally issued within the framework of programmes set up under the leadership of a financial institution – the ‘arranger’ – and placed with investors by one or more financial intermediaries (the ‘dealers’).
Due to the comparatively higher risk, commercial paper offers a higher return than treasury bills and bank deposits. It is usually a very safe investment because the financial situation of a company can generally be predicted with a high degree of accuracy over a couple of months. Most issuers are rated or well-known companies. Typical durations range from a few days to one year.
Commercial paper is relatively liquid (depending on the issuer and arranger), as it is negotiable and a secondary market is organised by the dealer (on a best effort basis). It can be considered as an alternative to a bond issue.