Which of the following describes commercial paper?

Commercial paper is best described as an unsecured promissory note that companies use to raise short-term funds for various operational needs, such as inventory purchases or other immediate expenses. This financial instrument is typically issued by corporations and is sold at a discount to face value, which means the investor receives less than the face value at maturity, reflecting the interest earned.

The key feature that distinguishes commercial paper is its unsecured nature; it is not backed by collateral. Therefore, the risk for investors lies in the issuing company's creditworthiness, which is assessed through credit ratings. While commercial paper is indeed a form of debt, it is designed for short-term financing, usually with maturities ranging from a few days to up to nine months.

In contrast, a secured promissory note involves collateral, meaning if the borrower defaults, the lender can claim the asset backing the note. Long-term investment instruments typically refer to instruments like bonds or stocks, which are not focused on short-term financing. A type of bank loan usually involves direct borrowing from a financial institution with specific repayment terms, which is different from the nature of commercial paper. Understanding these distinctions helps clarify why the characterization of commercial paper as an unsecured promissory note is accurate.