What Is Commercial Paper?
Commercial paper is a promissory note sold by a corporation to raise cash for short-term working capital rather than long-term projects. Because it is unsecured, only companies with strong credit ratings can issue it at attractive rates. Paper is typically sold at a discount to face value in large denominations, commonly $100,000 or more, which puts the market squarely in institutional hands.
The 270-day maturity ceiling is not arbitrary. Under Section 3(a)(3) of the Securities Act of 1933, short-term notes used for current transactions are exempt from SEC registration, which keeps issuance fast and cheap. In practice most programs issue paper maturing in one to two months and simply roll it over — repaying old paper with proceeds from new paper — again and again.
How the Market Works
Issuers sell paper either directly to investors or, more commonly, through dealer desks at major banks. Buyers are dominated by money market funds along with corporate treasurers parking excess cash. Short-term ratings matter enormously: paper rated A-1 by S&P and P-1 by Moody's trades at the tightest yields, while a downgrade to the second tier can shut an issuer out of the market almost overnight.
Because programs depend on continuous rollover, issuers maintain backup revolving credit facilities with banks so they can repay maturing paper if the market freezes. A related segment, asset-backed commercial paper, is secured by pools of receivables and other assets held in special-purpose vehicles. Yields on commercial paper sit slightly above Treasury bills of similar maturity, reflecting the incremental credit risk.
Why Commercial Paper Matters
The market's fragility becomes obvious in a crisis. When Lehman Brothers defaulted on its paper in September 2008, the Reserve Primary Fund "broke the buck," triggering a run on money market funds and a freeze in rollover funding for even blue-chip issuers. The Federal Reserve responded with the Commercial Paper Funding Facility, a backstop it revived again in March 2020 when pandemic panic hit short-term markets.
For students targeting finance careers, commercial paper connects several worlds at once: corporate treasury, money markets, bank credit lines, and Fed policy. Understanding why a company might fund at 5% for 30 days instead of locking in long-term bonds — and what happens when it suddenly cannot roll that paper — is a practical test of how liquidity risk actually works.
