Commercial paper is a term used broadly to describe business documents that are either orders or promises to pay money. There are two main kinds of commercial paper, the draft and the promissory note. A draft is a written order to a business or individual to pay a specified amount of money to another business or individual. The most common type of draft is a check. A promissory note is a written promise to pay a specified sum of money to a certain person on a future date.
When financial experts speak of commercial paper, they use the term in a narrow sense to mean short-term promissory notes issued by corporations. Many corporations borrow money by selling such notes to investors. On the date specified on the note, the corporation pays the investor the full amount of the note, plus interest. The interest rate on most commercial paper is less than the interest on a bank loan. However, only large corporations with good credit ratings can issue commercial paper. Most commercial paper matures (becomes due) in less than 270 days.
Many people believe commercial paper is a good investment, particularly during periods of inflation. The short maturity period enables investors to redeem their money quickly and reinvest it at higher interest rates. However, such notes are unsecured–that is, they do not give the lender legal claim to any property if the loan is not repaid.
