Commercial Paper

What is a Commercial Paper?

Paper, or commercial paper, is a very short-term loan issued to a company for financing short term liabilities. The main features of commercial paper are:

  • Very short maturity, no more than 270 days
  • No collateral required, usually meaning only financially stable firms can receive it
  • Lower interest rates than would be obtained by other means

Due to the fact that collateral is not required and that the interest rates are relatively low, many banks use commercial paper to finance their lending and to leverage up. They can borrow vast amounts through commercial paper and then make long-term investments with a higher interest payment rate, and continually roll over their short term debt using commercial paper and funding it through the investment interest payments.

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