KINDS OF COMMERCIAL PAPER

To begin with I would like to determine the term “commercial paper”. Commercial paper is short-term unsecured senior debt issued in the open market by both financial and nonfinancial companies with strong credit ratings. There are some types of commercial paper:

Promissory Notes. The promissory note is the simplest form of commercial paper; it is simply a promise to pay money. In a promissory note, one person (known as the maker) makes an unconditional promise in writing to pay another person (the payee), or a person specified by the payee, a specified sum of money either on demand or at some particular time in the future.

The promissory note is primarily a credit instrument. It is used in a wide variety of transactions in which credit is extended. For example, if you purchase an automobile on credit, the dealer will probably have you sign a promissory note for the unpaid balance of the purchase price. Similarly, if you buy a house, the lender who takes a mortgage on the house will have you sign a promissory note for the amount due on the mortgage. The note will probably have a notation on it that it is secured by a mortgage. The terms of payment of your note should correspond with the terms of your sales contract for the purchase of the car or the house.

Certificates of Deposit. The certificate of deposit that your bank or savings and loan association may give you when you make a deposit of money is a form of commercial paper and a type of note. Like the promissory note, the certificate of deposit is a promise to pay money. When a bank issues a certificate of deposit (CD), it acknowledges that it has received a deposit of a specific sum of money. It also agrees to pay the owner of the certificate the sum of money plus a stated rate of interest at some time in the future.

Draft. A draft is a form of commercial paper that involves an order to pay money rather than a promise to pay money. The most common example of a draft is a check. A draft has three parties to it: One person (known as the drawer) orders a second person (the drawer) to pay a certain sum of money to a third person (the payee). Drafts other than checks are used in a variety of commercial transactions. However, they are used much less frequently than checks.

Checks. A check is a draft that is payable on demand and on which the drawer is always a bank. The check is the most widely used form of commercial paper. By issuing a check, you are ordering the bank at which you maintain an account to pay a specified person, or someone designated by that person, a certain sum of money from your account.

So, commercial paper is one of the oldest and most widely used money market instruments in the world.