The term "commercial paper" refers to very short-term bonds issued by large corporations with the highest credit ratings such as IBM, General Electric, and Wal-Mart. Essentially, investors who buy commercial paper market are making short-term loans to corporations. The funds received by these corporations through the sale of commercial paper are often used to finance operations, production, and payrolls.
Commercial paper is generally considered as safe as the company that issues it. There is no government guarantee or protection on commercial paper and it is not covered under FDIC insurance. Of concern to some investors, is the fact that commercial paper does not require SEC registration as a security if it matures in less than 270 days.
Commercial paper rates are relatively low compared to longer-term bonds, but still higher than substantially safer Treasury Bills.
Commercial paper is usually issued at a discount to its eventual maturity amount. The difference between the purchase price and the face value equals the investor's return on the commercial paper. Since commercial paper is usually issued in minimum amounts of $100,000 or more, it is primarily purchased by money market mutual funds and other corporations looking to maximize their short-term deposits.
