Commercial paper.
In plain English
Commercial paper is a short-term unsecured note issued by a corporation or financial firm to fund payroll, inventory, and other near-term needs. It is sold at a discount to face value rather than paying a coupon, so the investor's return is the gap between what they pay and what they collect at maturity. Maturities are short by design, which keeps the paper exempt from full securities registration. Buyers are mostly money market funds and other institutions, and minimum sizes are large. Because it is unsecured, the buyer is relying on the issuer's credit quality and on its ability to roll the paper over when it comes due.
01Why it matters
When commercial paper buyers step back, otherwise healthy companies can suddenly struggle to make payroll, which is how a credit freeze turns into layoffs fast.
02The math, step by step
Say a company sells 1 million dollars of 90-day paper for 990,000 dollars. The investor collects 1 million at maturity, earning 10,000 dollars on 990,000. That is about 1.01 percent over three months, roughly 4.1 percent annualized.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
It is not a bond. Commercial paper matures in months, not years, is usually unsecured, and pays through a discount rather than coupons. A bond investor worries about years of credit risk. A paper investor mostly worries about whether the issuer can refinance in a few weeks.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice