Commercial papers (CPs) are short-term, unsecured debt instruments issued by corporations, financial institutions, and other entities to raise funds for their short-term operational needs, like inventory purchases, payroll, or short-term liabilities. Typically, they are issued at a discount and redeemed at face value upon maturity, which usually ranges from a few days to up to 270 days.
Key features of commercial papers:
1. **Unsecured**: They are not backed by any collateral, so only financially sound and creditworthy companies can issue them.
2. **Short-Term**: The maturity period is short, typically between 1 and 270 days.
3. **Issued at a Discount**: CPs are usually sold at a discount to their face value, and investors receive the full face value at maturity.
4. **High Denominations**: CPs are typically issued in large denominations, making them a popular investment for institutional investors rather than individuals.
5. **Liquidity**: Because of their short-term nature and high-quality issuers, they are considered a liquid asset.
Commercial papers are an important tool for companies to meet their working capital needs without going through more expensive and time-consuming long-term borrowing methods like bank loans or bonds.
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