Commercial paper, a term that sounds little technical and complicated. With this term then arises various questions like,
What are commercial papers?
What it means to invest in commercial papers?
Who can Invest in commercial papers?
How to invest in Commercial Paper?
How risky it is to invest in commercial papers?
Well, questions are many, but the good thing is you don’t need to worry about these questions. We have summarized the answers in a very structured format. Hopefully, you will be able to understand the topics clearly.
Coming back to our first questions what are commercial papers. Let us understand this thing any company can raise money via various modes. Some of them are from banks A commercial paper is a short term debt instrument issued by big corporate companies to raise money. It is also called unsecured because it is not backed by collateral.
What is the risk
Certainly there is no risk for the company issuing the commercial papers. Either the company will make profits and share it with investors or it will loose money of the investors.
Some risk is involved if an investor invests in commercial papers. If the company defaults investor will loose all the money. But the good thing for investors investing in this debt instrument is the chances that company will default is very very less.
Just to make you comfortable let me share the fact that, very less number of defaults (some 8 to 10) defaults has been recorded with the commercial papers.
Why the risk is so less?
Only big corporates with strong fundamentals can sell commercial papers. Above all firms are checked for their credit ratings. only the firms with outstanding credit ratings are allowed to issue these securities. After such good ratings, the chance that the company will default is negligible.
Feaures of commercial Papers
Short Term Debt Instrument
Only Big Corporates can issue CP
Issued for not more than a year