Commercial Paper

Commercial paper (CP) is a short-term IOU issued by large, creditworthy corporations to raise quick cash — usually for 1 to 270 days. It is unsecured (no collateral), sold at a discount, and redeemed at face value.

Example: A company issues $1 million in commercial paper at a 2% discount for 90 days. An investor buys it for $980,000 and receives $1 million when it matures. The $20,000 difference is the investor's return. Companies use CP to fund payroll, inventory, and accounts payable.

The commercial paper market is massive — over $1 trillion in the US alone. Only companies with high credit ratings (typically A-1/P-1) can issue CP. During the 2008 crisis, the CP market froze, forcing the Federal Reserve to step in with emergency liquidity programs.