Commercial Paper

Background

Commercial paper serves as a mechanism for major banks and corporations to meet short-term debt obligations. It represents an unsecured promissory note with a fixed maturity, generally less than 270 days.

Historical Context

Introduced in the late 19th century, commercial paper initially provided corporations a flexible way to access short-term funds without going through complex banking processes. Over time, its prominence rose, becoming a crucial tool in the money markets for liquidity management and short-term financing.

Definitions and Concepts

Commercial Paper: An unsecured, short-term debt instrument used by corporations to finance short-term liabilities.
Maturity: The duration for which the commercial paper remains active before repayment. Typically, it is less than 270 days to avoid SEC registration requirements.
Promissory Note: A financial instrument wherein the issuer promises to pay back the borrowed amount at a predetermined future date.
Discount from Face Value: Commercial paper is sold for less than its face value, with the face value being what’s repaid upon maturity.

Major Analytical Frameworks

Classical Economics

Role: Viewed as an efficient means to support working capital and liquidity management, commercial paper aligns with classical theories emphasizing the self-regulating nature of markets.

Neoclassical Economics

Focus: Analyzes the allocation efficiency brought by commercial papers to optimize short-term debt financing.

Keynesian Economics

Emphasis: From a Keynesian perspective, commercial papers allow corporations to manage liquidity effectively, aiding aggregate demand by ensuring consistent operational financing.

Marxian Economics

Critique: Potential exploitation observed through unsecured borrowing, viewed critically from a Marxian standpoint regarding capital concentration and power dynamics.

Institutional Economics

Analysis: Stresses the importance of regulatory frameworks and the minimal intervention feature (no SEC registration under 270 days) facilitating flexible corporate financial planning.

Behavioral Economics

Approach: Examines the psychological impact and decision-making processes of corporate treasurers in using commercial paper for short-term financing.

Post-Keynesian Economics

Interpretation: Highlights the financial stability commercial papers provide to corporations in key economic sectors, reinforcing long-term equilibrium concepts.

Austrian Economics

Perspective: Endorses the non-interventionist perspective of commercial papers as efficient, short-term, market-based solutions for financing.

Development Economics

Viewpoint: Acknowledges industrial advancement and the ease for emerging markets corporations to manage financing via commercial papers, fostering economic growth.

Monetarism

Insight: Examines the role of commercial papers in broader monetary supply, affecting liquidity management and policy.

Comparative Analysis

Commercial Paper vs. Bonds: Commercial paper has a shorter duration, typically under 270 days, and is unsecured compared to the longer-term, and often secured, nature of bonds.
Regulatory Treatment: Commercial papers enjoy reduced regulatory scrutiny (less than 270 days maturity), making them easier to issue compared to registered securities.

Case Studies

Roll-out Strategies of Major Corporations: Insights into how firms like GE or JP Morgan have harnessed commercial paper issuance for short-term financing needs.
Crisis Period Responses: Examination of commercial paper market reactions during financial crises, including 2008 and COVID-19 economic responses.

Suggested Books for Further Studies

“Commercial Paper: A Handbook” by William H. Gilmore
“Foundations of Capital Markets Regulation” by Howell E. Jackson, Louis Loss, Peter S. Menell

Debt Instruments: Any financial claims issued or raised that represent money owed by the borrower to the lender.
Money Market: The segment of the financial market in which financial instruments with high liquidity and short maturities are traded.
Unsecured Loan: A loan that is issued and supported only by the borrower’s creditworthiness, rather than by any type of collateral.
Securities and Exchange Commission (SEC): U.S. federal agency responsible for regulating the securities industry and protecting investors.