Handbook of Finance: Financial Markets and Instruments

Chapter 27. Commercial Paper

MOORAD CHOUDHRY, PhD

Head of Treasury, KBC Financial Products, London

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

STEVEN V. MANN, PhD

Professor of Finance, Moore School of Business, University of South Carolina

Abstract: A corporation that needs long-term funds can raise those funds in either the bond or equity markets. Alternatively, if a corporation needs short-term funds, it may attempt to acquire funds via bank borrowing. One close substitute to bank borrowing for larger corporations with strong credit ratings is commercial paper. Commercial paper is a short-term promissory note issued in the open market as an obligation of the issuing entity. Commercial paper is sold at a discount and pays face value at maturity. The discount represents interest to the investor in the period to maturity. Although some issues are in registered form, commercial paper is typically issued in bearer form.

Keywords: direct paper, dealer paper, rollover risk, yield on a bank discount basis, asset-backed commercial paper, special purpose corporation, conduit, single seller, multi-seller, liquidity enhancement

The commercial paper market was developed in the United States in the latter days of the nineteenth century and was once the province of larger corporations with superior credit ratings. However, in recent years, many lower-credit-rated corporations have issued commercial paper by obtaining credit enhancements or other collateral ...