Final answer:
Commercial paper is a short-term, unsecured debt instrument used by corporations for immediate operational needs with maturities usually under 270 days. It typically has high credit quality and a lower interest rate compared to longer-term bonds.
Step-by-step explanation:
Commercial paper
is an unsecured, short-term debt instrument utilized by corporations to finance their immediate operating expenses, such as inventory and payroll. It typically has a maturity period of less than 270 days. The
credit quality
of commercial paper is usually high, as it is often issued by companies with good credit ratings. Due to its short-term nature, commercial paper offers a lower interest rate than longer-term corporate bonds. However, the interest rate on commercial paper can vary based on the issuer's credit rating and market conditions.
When compared to bonds, commercial paper is less complex. Bonds generally have longer maturities, various interest payment schedules, and the ability for investors to compute a bond's present value based on its face value, interest rate, and maturity date. While commercial paper is a form of corporate debt like bonds, it is distinguished by its short maturity period and is not typically used for long-term financing needs.