A written instrument that constitutes short-term obligations with maturities ranging from 2 to 270 days (however, most commercial paper (CP) matures in roughly 30 to 45 days), and manifests the pledge of one party to pay money to another. It is typically issued by companies, banks, and other borrowers to investors with temporarily unused cash. Such instruments are unsecured, i.e. they are not backed by collateral, and therefore CP issuers must have usually high credit rating.

Similar to bonds, commercial paper is typically discounted or interest-bearing. Ordinarily, commercial paper is particularly popular in facilitating business transactions thanks to its reliability and convenience as a means of dealing with large amounts of money without using cash. Many firms find it to be a lower-cost alternative to bank loans. Furthermore, negotiability is one of the most remarkable aspects of commercial paper. That means it can be freely transferred from one party to another, either through endorsement or delivery. Hence, commercial paper and negotiable instrument are often used interchangeably.

Commercial paper provides an effective means for companies willing to raise money for short-term uses (that is to finance working capital) such as inventory investment, funding credit cards, or for payrolls. As vast portions of the commercial paper market must be “rolled over” or reissued after maturity of previous issues, companies will be required to tap the market quite often.

The primary commercial paper include: drafts, checks, promissory notes, and certificates of deposit. The most fundamental type, however, is a promissory note, which represents a written pledge to pay money to a person (payee) to whom payment is promised. This person can be either a specifically designated individual or firm or merely the bearer who has it in his physical possession.