Commercial Paper - why to invest.

Essay by d3v14ntA+, November 2003

download word file, 4 pages 3.0

Commercial Paper, otherwise known as CP, is an obligation issued by a corporation or a bank to finance its short term credit needs. It can be either unsecured or asset-backed. Maturities can range from 2 to 270 days. It is available in many denominations, can be either discounted or interest bearing, and usually has a small or nonexistent secondary market. It is issued by companies with high credit ratings and therefore considered to be a relatively low risk investment.

Companies like GM or PepsiCo are multi billion dollar companies. They have many accounts with their vendors and suppliers. Sometimes they have short term needs for large amount of cash to pay certain accounts like receivables or inventory. Rather than taking a large loan from a bank they will issue promissory notes to investors or investment companies usually at a lower interest rate than what they could have obtained from a bank loan.

This provides a win-win situation for both the company and the investor.

Commercial paper is usually issued in very large denominations and isn't ordinarily purchased by the general public. Minimum denominations are usually $100,000, although face amounts as low as $10,000 are available from some issuers. Because most investors are institutions, typical face amounts are in multiples of 1 million. Issuers will usually sell an investor the specific amount of CP needed.

Although CP is considered to be an investment vehicle, it is not required to be registered with the SEC. The SEC does not require anything investment with a maturity less than 9 months to be registered. Corporations took advantage of this loophole and this is the reason the maximum maturity on any CP is 270 days.

A major factor in the lack of registration with the SEC is that registration for short term securities is...