Commercial Paper (CP) is a short term unsecured negotiable instrument, consoling of usance promissory notes with a fixed maturity. It is issued on a discount on face value basis but it can also be issued in interest bearing form A CP when issued by a company directly to the investor is called a direct paper. The companies announce current rates of CPs of various maturities, and investors can debt those maturities which closely approximate their holding period. When CPs are issued by security dealers dealers on behalf of their corporate customers, they are called dealer paper. They buy at a price less than the commission and sell at the highest possible level. The maturities of CPs can be tailored within the range to specific investments.
A CP has several advantages for both the issues and the investors. Companies which are able to raise funds through CPs have financial standing. The CPs are unsecured and there are no limitations on the end use of funds raised through them. As negotiable transferable instruments, they are highly liquid. The creation of the CP market can result in a part of inter corporate funds flowing into the market which would come under the control of monetary authorities in India.