Commercial Real Estate Dictionary

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Commercial paper

Definitions of Commercial paper
  • Commercial paper is a short-term promissory note. Commercial paper is typically unsecured. Short term generally means less than 1 year, however in the United States registration with the SEC is required for maturities greater than 270 days.

What Is Commercial Paper?

Commercial paper is a promissory note issued to borrow money for less than one year. Commercial paper is typically sold at a discount from its face value. Commercial paper is a useful tool for large corporations who have strong financial reputations that need to ensure short-term liquidity.

Commercial Paper vs Bonds

Commercial paper works similar to bonds. They are both an instrument through which a company can borrow money. They are both sold at a discount from their face value on financial markets. The key distinction of commercial paper is it is used for short term borrowing - less than 270 days. Consequently, rates on commercial paper may be lower.

Short Term Liquidity

In finance, short term generally refers to periods of less than one year. In the United States, short term has been specified as 270 days because of SEC regulations. Instruments with a maturity greater than 270 days are required to be registered with the SEC. Commercial paper may be issued for any period less than 270 days so you may see terms of 1 day, 30 days, or 90 days.

Since commercial paper is a short term instrument, it is traded on the money market. The money market allows investors and borrowers to trade instruments, such as commercial paper, certificates of deposit, and T-bills. In the money market, investors can place funds for short periods of time, while borrowers can acquire funds to bridge short term liquidity gaps. However commercial paper is not insured by the FDIC.

Lower Interest Rates

Commercial paper interest rates can be attractive because funds can be borrowed at lower rates than other options such as lines of credit from banks. Large credit worthy corporations and financial institutions may use commercial paper to avoid the process of requesting credit from banks while reducing the cost of those funds.

The Federal Reserve tracks commercial paper interest rates on commercial paper and makes the information available to the public. In addition to tracking commercial paper interest rates, the Fed may provide liquidity to the economy and the money market by funding commercial paper transactions.

Benefits of Commercial Paper

Commercial paper is a financial instrument that allows investors and credit worthy borrowers to maintain short term liquidity while maximizing the value and reducing the cost of their capital. Consequently, it allows central banks another avenue to influence liquidity in financial markets through open market operations.


Real Estate Terms

1. How much cash will be required to make your mortgage payments? Debt Service >>

2. Who can you go to to finance your construction or development project? Construction Lender >>

3. What professional can assist you in maximizing the value of your investment property? Asset Manager >>

4. How can we assess future commitment to infrastructure to support our communities and future development? Capital Improvements Projects >>

5. What measurement indicates if a property's financial performance can cover its debt? DSCR >>

6. What part of a city is the center of urban economic development? CBD >>

7. What allows property owners and professionals to estimate the market value of a commercial property? Comparable Property >>

8. What can landords do to entice prospective tenants? Concession >>

9. What critical factor do stores depend on to drive traffic? Anchor Tenant >>

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