Commercial paper

Commercial paper is an unsecured promissory note issued by a corporation to raise short-term funds. Instead of borrowing from a bank or issuing long-term bonds, large companies with strong credit ratings sell commercial paper to finance temporary needs such as payroll, accounts payable, and inventory purchases.

Commercial paper is issued with a maximum maturity of 270 days, and most paper matures much sooner — often within 30 to 90 days. It is generally sold at a discount to face value rather than paying periodic interest: an investor might pay $985,000 for paper that pays $1,000,000 at maturity, with the difference representing the interest earned. Because maturities are short and issuers are typically well-established companies, commercial paper is considered a money market instrument with relatively low risk, though it is backed only by the issuer's promise to pay.

The 270-day cap exists for a regulatory reason, but short maturity alone isn't the test. Under Section 3(a)(3) of the Securities Act of 1933, a note is an exempt security only if it matures within nine months (270 days) *and* the proceeds fund a current transaction — working capital needs rather than plant, equipment, or long-term investment — and the paper is of prime quality sold in denominations not ordinarily bought by the general public. Typical corporate commercial paper satisfies all three, so it can be sold without a registration statement or prospectus. This makes it a fast, low-cost way for corporations to borrow, and it is a classic exam example of an exempt security.

Commercial paper appears throughout the FINRA exam lineup. The SIE, Series 7, and Series 6 exams all test its maximum maturity, its discount pricing, its unsecured status, and its exemption from registration under the Securities Act of 1933.