Final answer:
Commercial Paper (CP) is a short-term debt instrument issued by large corporations with high credit ratings, used for financing liabilities and managing working capital. It has maturities ranging from 1 to 270 days and is priced based on market rates and the company's credit profile. CP is redeemed at maturity, and while typically sold directly to investors, it can also be traded in secondary markets.
Step-by-step explanation:
Use Cases for Commercial Paper (CP)
Commercial Paper (CP) is a short-term, unsecured promissory note issued by high-credit-quality corporations. It is utilized for financing short-term liabilities, funding inventory, and managing working capital. CP typically suits companies with high credit ratings that seek flexible and efficient funding sources without collateral.
Companies That Issue Commercial Paper
Typically, large corporations with strong credit ratings, such as financial institutions, manufacturers, and service firms, issue CP. These companies prefer CP due to its lower borrowing costs compared to bank loans.
Common Maturities and Pricing
CP is issued for varying maturities, ranging from 1 to 270 days. The most common maturities are 30, 60, and 90 days. CP is priced based on the prevailing market rates and the issuing company's credit rating, yielding slightly higher returns than Treasury bills due to the slightly higher risk involved.
Redemption of Commercial Paper
CP is redeemed at maturity, with the issuing company paying the face value to the investor. It is typically sold in the primary market directly to investors or through dealers, and secondary market trading may occur before maturity.