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Promissory
notes that are issued by PRIME RATED
commercial firms and companies (not to be confused with DEBENTURES).
Commercial paper is issued for a short term, anywhere from 2 to 270 days.
Commercial paper is NEGOTIABLE.
They
are used to clear up current debts owed by the issuer. They may or may not
carry interest. If they are not interest-bearing, then they are
flat-rated: You lend me $100,000 today and next week I'll pay you back
$100,050. In this case, an investor would pay $100,000 for a
promissory note with a face value of $100,050. This is called buying at
discount.
Commercial
paper is generally marketed through DEALERS,
as opposed to being traded in the SECONDARY
MARKET. The dealers who specialize in commercial
paper have a stable of clients who are familiar with the firms or types of
firms to whom they are lending money, and the paper is configured specifically
for those types of investors.
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