What type of financial instrument is commercial paper?

Commercial paper is classified as an unsecured promissory note used by corporations to obtain short-term financing. This instrument is typically issued at a discount to its face value and matures within a short period, usually ranging from a few days to a year. Companies utilize commercial paper to meet immediate financial obligations, such as paying for inventory or covering operational costs, because it is a quick way to raise funds without the collateral requirements associated with secured loans.

Being unsecured means that it does not have any assets pledged behind it, which differentiates it from secured loans where specific assets guarantee repayment. Companies with high credit ratings can issue commercial paper at lower interest rates, making it an attractive option for large, financially stable companies looking for short-term funding. Other options, such as government-backed bonds or insurance policies, serve different purposes and have distinct characteristics that do not align with the nature of commercial paper.