Commercial Paper Product Overview

Commercial Paper

	Product Overview

	Features and Benefits

	Risks

Product Overview

Commercial paper is short-term, unsecured debt typically issued by large capitalized firms to finance their day to day cash needs. Maturities range from overnight to 270 days. Commercial paper is generally considered to be the highest yielding money market investment.

Commercial paper is zero coupon debt, meaning that the investor buys the bond at a discount from face value (par), holds the bond until maturity, and earns interest income based on the difference between the buy price and the face value. Commercial paper is subject to federal and state taxes.

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Features and Benefits


Ratings
In general, each issuer's commercial paper gets rated by Standard & Poor's and Moody's. Those ratings are similar to ratings for longer-maturity corporate bonds but are specifically created for commercial paper. Commercial paper ratings place more emphasis on liquidity.
•		A-1/Prime-1- The highest rating; it indicates a strong degree of safety concerning timely payment. Issues with extremely strong safety characteristics are designated as A-1+/Prime-1+.
•		A-2/Prime-2- The rating for a satisfactory security; the relative safety of an investment in this rating category is not as high as in the A-1/Prime-1 category.
•		A-3/Prime-3- The rating for an adequate level of investment safety. Issues with this rating are more susceptible to market fluctuations than obligations with higher ratings.

Minimum investment
•		Typically a minimum investment of $100,000 for securities with maturities of 90 days or greater and $500,000 for securities with maturities of less than 90 days.
•		Additional commercial paper is purchased in increments of $1,000.
•		Trades typically settle for cash, with trading ceasing at 11:30 a.m. EST.

Higher yields
•		Commercial paper tends to have higher yields than other money market instruments.

Liquidity
•		Redemption prior to maturity is subject to market conditions. Commercial paper buyers should generally be buy and hold investors.

Limited reinvestment risk
•		A shorter maturity limits the risk of interest rate fluctuations.

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Risks


Interest rate risk
•		Like all fixed income securities, commercial paper prices are susceptible to fluctuations in interest rates. If interest rates rise, commercial paper prices will decline.
•		The short-term nature of a commercial paper investment makes it less susceptible to interest rate risk than many other fixed income securities because interest rate risk typically increases as maturity lengths increase.

Lower yields relative to longer-term corporates
•		Commercial paper tends to yield smaller returns than longer-term corporate debt because securities with shorter maturities typically have lower effective yields than those with longer maturities.

Credit risk
•		As with most fixed income securities, there is a chance that the issuer will default on its commercial paper obligation.