Definition
The term short-term paper refers to debt securities issued at a discount, with maturities that range from ninety days to nine months. Short-term paper may be issued by government agencies, large financial institutions, or corporations. Examples of these securities include commercial paper, promissory notes, and Treasury bills.
If held by another company, these obligations fall into the category of short-term investments, while the entities issuing these securities would classify them as a current liability on the balance sheet.
Explanation
In the course of normal business operations, companies require cash to pay for goods and services, including salaries of employees. Sound financial management techniques go beyond holding cash in bank accounts, or borrowing money using lines of credit.
Government agencies, large financial institutions, and corporations may depend on short-term paper to help finance their day-to-day operations, while others might invest in these securities as an alternative to holding cash in a bank account.
Short-term paper is usually issued at a discount, and the difference between the purchase or sales price and the face value of the security represents the financing cost or return on investment. Since these investments are typically issued by financially strong entities, the risk of default is low. Maturities between 90 and 270 days also insulate investors from interest rate risk.
Short-term paper can be placed into the market directly by the issuer, typically to a large institutional investor as part of a money market fund. Some dealers also specialize in placing short-term paper in the marketplace. Trading in these investments is robust, providing investors with the ability to liquidate their holdings quickly.
Related Terms
current assets, marketable securities, short-term investments
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