Commercial paper consists of short-term, unsecured promissory notes issued by finance companies and certain industrial firms. It constitutes the largest dollar â€“ volume instrument in the money market. Commercial paper can be sold by the issuing firm directly or through dealers acting as intermediaries. Because of the volume, a number of large finance companies have found it cheaper to sell their paper directly to investors, thus by passing dealers. Among companies selling paper on this basis are General Electric Capital Corporation, Ford Motor Credit Company, General Motors Acceptance Corporation (GMAC), and sears, Roebuck Acceptance Corporation.
Paper sold through dealers is issued by industrial companies and smaller finance companies. Dealers carefully screen the creditworthiness of potential issuers. In a sense, dealers stand behind the paper they place with investors.
Usually commercial paper is sold on a discount basis. Maturities generally run up to 270 days, and when directly placed, commercial paper is often tailored to mature on a specific date specified by the purchaser. Most paper is held to maturity, and there is no formal secondary market. However, direct sellers of commercial paper will often repurchase the paper on request.
Arrangements may also be made through dealers for repurchase of paper sold through them. Because of the absence of an active secondary market and the slight (but present) credit risk involved in corporate issuers, commercial paper has a somewhat higher yield than Treasury issues of similar maturity — or, about the same yield as available on similar maturity bankersâ€™ acceptances. Paper sold directly generally commands a lower yields than does paper sold through dealers. Commercial paper is sold only in fairly large denominations, usually at least $100,000.
Commercial paper issued in the United States by foreign corporation is called Yankee commercial paper. For instance, Mercedesâ€“Benz AG might issue commercial paper in the Unites States to help finance working capital needs for its US assembly plant. Commercial paper issued and sold outside the country in whose currency the security is denominated is called Euroâ€“commercial paper (Euro CP).
Dutch-guilder denominated commercial paper issued by General Motors in Germany would be an example. Euroâ€“commercial paper gives the issuer the added flexibility to borrow in a variety of currencies. Though Euro-commercial paper is similar to domestic (US) commercial paper, there are some differences. For instances, although US commercial paper usually matures in less than 270 days, the maturity of Euroâ€“ commercial paper can be considerably longer due to its freedom from certain US securities regulations. Also, because of the generally longer maturity of Euroâ€“ commercial paper versus US commercial paper, a more active secondary market has developed for Euroâ€“commercial paper than for US commercial paper.