Alternatively, if a corporation needs short-term funds, it may attempt to acquire funds via bank bor- rowing. One close substitute to bank borrowing for larger corporations with strong credit ratings is commercial paper. Commercial paper is a short-term promissory note issued in the open market as an obligation of the issuing entity. Commercial paper is sold at a discount and pays face value at maturity. The discount represents interest to the investor in the period to maturity. Although some issues are in registered form, commercial paper is typically issued in bearer form.

The commercial paper market was developed in the United States in the latter days of the nineteenth century and was once the province of larger corporations with superior credit ratings.However, in recent years, many lower-credit-rated corporations have issued commercial paper by obtaining credit enhancements or other collateral to allow them to enter the market as issuers. Issuers of commercial paper are not limited to U.S. corporations; foreign corporations and sovereign issuers also issue com- mercial paper. Commercial paper was first issued in the United Kingdom in 1986 and was subsequently issued in other European countries.

Although the original purpose of commercial paper was to provide short-term funds for seasonal and working capital needs, it has been issued for other purposes, most prominently for "bridge financing." For example, suppose that a corporation desires long-term funds to build a plant or acquire equipment. Rather than raising long-term funds immediately, the issuer may choose to postpone the offering until more favorable capital market conditions prevail. The funds raised by issuing commercial paper are employed until longer-term securities are issued. Commercial paper is also used as bridge financing to finance corporate takeovers.

CHARACTERISTICS OF COMMERCIAL PAPER

The maturity of commercial paper is typically less than 270 days; a typi- cal issue matures in less than 45 days. Naturally, there are reasons for