Commercial papers are short-term maturity loans issued through a large corporation that are unsecured. They are typically discounted but are competitive with current money market interest rates. When we talk of short-term with commercial papers, we are talking about no longer than nine months, with many being more in the one to two month maturity range. These short-term money market investments offer a short-term way of investing one’s money. They are low risk, as commercial papers are generally only offered from companies with great financial standing and credit worthiness. Companies defaulting on a commercial paper investment is almost unheard of in the last forty years.
The downfall of commercial papers is the investment itself. They are typically not offered in lower denominations, and are oftentimes investments of $100,000 or more. This eliminates commercial papers as a viable investment opportunity for those with less money to put in money market securities. They are also unsecured, so this should be considered when determining whether commercial papers are an effective short-term investment for your portfolio.