Commercial PaperCP
Commercial paper is short-term, unsecured debt issued by large companies and financial institutions to fund day-to-day needs. In the US it usually matures within 270 days and is sold at a discount, mainly to money market funds and other institutions.
Big companies need cash for payroll, inventory and other short-term needs. Rather than borrowing from a bank, many issue commercial paper — IOUs that mature in weeks or months. It's a cheap funding source in calm times, but it can dry up fast in a crisis. This entry explains how commercial paper works, who buys it and its risks.
- Category
- Bonds and Interest Rates
- Reading time
- 3 min
- Also called
- CP, Asset-backed commercial paper, ABCP
- Updated
Commercial paper in plain words
Commercial paper is short-term, unsecured debt issued by large corporations and financial institutions as a cheaper alternative to other funding.1
It is a money market instrument that generally matures within 270 days.1
Asset-backed commercial paper is one of the building blocks of the shadow banking system.2
How commercial paper works, step by step
A company needs short-term cash
For payroll, inventory or receivables.
It issues paper
Unsecured, short maturity.
Sold at a discount
Repaid at face value. See Par Value.
Investors buy it
Money market funds and institutions. See Money Market Fund.
Repaid or rolled
Often reissued at maturity.
Ratings matter
Only strong issuers can sell it cheaply. See Credit Rating.
Worked examples
Example 1 — Discount pricing
≈ 4.9% a yearA 90-day note with $1,000,000 face value sells for $988,000.
| Interest earned | $12,000 |
| Return over 90 days | $12,000 ÷ $988,000 ≈ 1.21% |
| Annualised (≈ ×4) | ≈ 4.9% |
Commercial paper is a short-dated money market instrument, typically sold below face value.1
Example 2 — Cheaper than a bank loan
$2m savedA company can borrow $200m via CP at 5.0% or from a bank at 6.0%.
| Annual saving | $200m × 1% = $2m |
Firms use commercial paper as an alternative to costlier funding methods.1
Example 3 — Rollover risk
Liquidity squeezeIn a crisis, investors refuse to buy new paper; a company has $5bn maturing next month.
| Funding gap | $5bn |
Short-term funding must be renewed constantly, so a market freeze can cause a cash crunch. See Credit Crunch.
Commercial paper vs Treasury bills
| Aspect | Commercial paper | Treasury bills |
|---|---|---|
| Issuer | Companies, banks | US government |
| Security | Unsecured | Government-backed |
| Yield | Slightly higher | Lower |
| Maturity | Up to 270 days | 4 to 52 weeks. See Treasury Bills, Notes and Bonds |
Who uses commercial paper
Large corporations
Working capital funding.
Banks and finance companies
Short-term liquidity.
Money market funds
Main buyers. See Money Market Fund.
Central banks
Backstop facilities in crises. See Central Bank.
Advantages and disadvantages
Advantages
- Cheap short-term funding.
- Flexible maturities.
- Low risk for top-rated issuers.
Disadvantages
- Unsecured.
- Rollover risk in crises.
- Only available to strong issuers.
Going deeper
Read as far as you need. Each level builds on the one before it.
Who can issue
Beginner
Commercial paper is used by large corporations and financial institutions with strong credit.1
Why 270 days
Intermediate
In the US, paper maturing within 270 days is generally exempt from SEC registration, which keeps issuance cheap and fast. In practice, commercial paper generally matures within 270 days.1
ABCP and 2008
Advanced
Asset-backed commercial paper funded long-term assets with short-term money and froze in 2007–2008, one of the shadow banking runs.2 See Shadow Banking.
Common mistakes
Assuming it's risk-free
It's unsecured corporate debt.
Ignoring rollover
Issuers depend on constant refinancing.
Confusing it with T-bills
Different issuers and risks.
Overlooking ABCP structures
Backing assets can be complex.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Commercial paper is short-term unsecured corporate debt.
- It usually matures within 270 days.
- It's sold at a discount to face value.
- Money market funds are the main buyers.
- Rollover risk bites in crises.
Frequently asked questions
Can individuals buy commercial paper?
Is commercial paper safe?
How is CP priced?
Further learning
- Money Market Fund
The main buyer.
- Shadow Banking
Where ABCP fits.
- Repo Market
Another short-term funding market.
- Credit Rating
Why ratings matter for issuers.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Commercial Paper (opens in a new tab) Checked .
- Corporate Finance Institute. Shadow Banking System (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.