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What is a Commercial Paper?
Commercial papers are debt instruments that are often utilized to meet short-term credit needs. As any unsecured obligation that is often utilized as an investment in a money market, the duration period for a commercial paper is limited. Generally, a commercial paper may carry a maturity from between one business day to six months from the date of issue.
Commercial paper is generally issued by corporations or by large banking institutions. The main function is usually to provide funds for the company’s Accounts Receivable in order to handle short-term obligations. The expectation is that the issuing party will be in a position to honor the face value plus interest by the date of maturity on the paper.
The commercial paper is not considered a proper debt instrument to generate funds for long term projects. When a company wishes to generate a source of revenue for any purpose that will exceed a six month window, other investing and fund raising strategies will work better than the short-term solution represented by the issue of a commercial paper.
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