1.1.8.6 Commercial Paper

Corporations raise long-term capital by issuing stocks and bonds. They raise short-term money by taking out loans from commercial banks and by issuing commercial paper to the investing public.

Commercial paper is a debt instrument that is offered sometimes as a discount instrument and sometimes as principal plus interest For a plus interest instrument, the client pays the full face value to buy the paper and receives the face value plus the interest accrued at maturity.

Neither type of instrument has a fixed interest rate. Instead, the rate is negotiated at the time of purchase and the interest is calculated from the face and full value. To receive the interest, the buyer must, for all practical purposes, hold the instrument until maturity. If the paper is sold during its life, its price is subject to market fluctuations. In the case of commercial paper, the secondary market is thin, almost non-existent.