What is a key characteristic of commercial paper?

A key characteristic of commercial paper is that it is a short-term debt instrument. This means that it is typically issued by corporations to finance their immediate cash flow needs, such as inventory purchases or payroll. Commercial paper usually has maturities ranging from a few days to up to nine months, making it a flexible and efficient way for businesses to manage short-term funding gaps.

The short-term nature of commercial paper helps organizations avoid longer-term financing costs and allows them to respond quickly to their operational needs. It's often issued at a discount from face value and does not require extensive regulatory approval, which further emphasizes its role as a straightforward and quick financing solution.

By understanding this characteristic, one can appreciate why businesses might prefer funding through commercial paper compared to other instruments that involve longer commitments or more stringent requirements.