Commercial Paper

Investments

Quick Definition

Commercial Paper is an unsecured, short-term debt instrument issued by companies to raise funds for working capital needs.

Detailed Explanation

Commercial Paper (CP) is used by large, financially strong companies to borrow money for short durations, typically ranging from a few days up to 1 year.

It is issued at a discount to face value and redeemed at full value on maturity, with the difference representing interest.

In India, CP is regulated by the Reserve Bank of India.

Key Features of Commercial Paper

  • Unsecured instrument (no collateral)
  • Short-term maturity (up to 1 year)
  • Issued at discount, redeemed at face value
  • Typically issued by high credit-rated companies

Who Invests in CP?

  • Banks
  • Mutual funds
  • Corporates
  • High net-worth individuals

Advantages

  • Lower borrowing cost compared to bank loans
  • Quick access to funds
  • Flexible short-term financing

Risks

[Image illustrating credit risk in unsecured debt instruments like commercial paper]
  • Credit risk (no collateral)
  • Only suitable for financially strong companies

Example

"A company issues Commercial Paper worth ₹1 lakh at ₹95,000 for 6 months. At maturity, the investor receives ₹1 lakh, earning ₹5,000."

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