Commercial Paper
Commercial Paper is an unsecured, short-term promissory note issued by large corporations, financial institutions, and government-sponsored enterprises to fund working capital and other near-term obligations, typically with maturities ranging from overnight to 270 days and sold at a discount to face value in the U.S. money market.
Commercial Paper serves as a critical short-term funding tool in the U.S. financial system. Issuers use it to bridge the gap between near-term cash outflows — payroll, supplier payments, seasonal inventory buildups — and the receipt of operating revenues or longer-term financing. Because commercial paper carries maturities below 270 days, issuers are not required to register the securities with the Securities and Exchange Commission under the Securities Act of 1933, reducing the time and cost of issuance relative to registered public debt.
Commercial paper is issued on a discount basis, meaning investors purchase it at a price below face value and receive the full face amount at maturity. The difference between the purchase price and the face amount represents the investor's return. Alternatively, some commercial paper is issued as interest-bearing at face value. The yield is typically expressed on a discount rate basis and benchmarked against Treasury bill rates, the Federal funds rate, or SOFR.
The U.S. commercial paper market is dominated by institutional investors — money market mutual funds, bank investment portfolios, corporate treasurers, and insurance companies. The Federal Reserve's Commercial Paper Funding Facility, established during the 2008 financial crisis and reactivated during the COVID-19 crisis of 2020, demonstrated the systemic importance of the commercial paper market: when investor demand evaporated and companies could not roll over maturing paper, the Federal Reserve stepped in as a buyer of last resort to prevent a liquidity crisis.
Commercial paper comes in two principal forms. Financial commercial paper is issued by banks, finance companies, and financial intermediaries. Non-financial commercial paper is issued by industrial corporations and large retailers. Asset-backed commercial paper (ABCP) is a variant where the paper is backed by a pool of receivables or other financial assets held in a special-purpose vehicle, providing structural support beyond the issuer's general credit.
Credit quality is paramount in commercial paper markets because the instruments are unsecured. Issuers must maintain strong short-term credit ratings — typically A-1 from S&P or P-1 from Moody's — to access the market at competitive rates. Below-investment-grade companies generally cannot issue commercial paper. The short maturity structure means credit analysis focuses on immediate liquidity, revolving credit facility coverage, and near-term cash flow visibility rather than long-term solvency.