Commercial paper or CP, is a short-term unsecured debt instrument issued by large corporations. It's commonly used to finance working capital needs, such as accounts receivable inventories, and short-term liabilities.

Issuers rely on commercial paper for flexible and efficient funding to manage their day-to-day operational expenses. Like treasury bills or T-bills, commercial paper is usually issued at a discount, meaning that investors pay less than the face value and receive the full amount or face value at maturity. However, commercial paper typically offers a slightly higher interest rate than T-bills to compensate for the credit risk associated with private issuers or private companies. However, commercial paper is typically issued by firms with the highest short term credit ratings from one or more of the large rating agencies such as Moody's, S&P, or Fitch. High credit ratings are crucial because many institutional investors, such as mutual funds and pension funds, are required to invest only in high quality paper or debt. These institutions prefer commercial paper with prime credit ratings, e.g., P1 from Moody's, or A1 from S&P ensuring that they are investing in low risk debt.

By maintaining these top tier credit ratings, issuers can consistently access the commercial paper market at competitive rates, allowing them to finance short term obligations efficiently. Depending on the issuer, commercial paper can be categorized into financial commercial paper issued by financial institutions like banks and corporate commercial paper issued by non-financial corporations.

From the investor's perspective, commercial paper is generally bought with the intention of holding it until maturity, which results in low liquidity in secondary markets. This is because investors typically view commercial paper as a short-term investment with a clear maturity date and fixed returns.

Given that commercial paper is often held to maturity, there is little trading in the secondary market.

Many investors employ a rollover strategy where they reinvest in new commercial paper from the same issuer when the original paper matures. This approach allows investors to keep their funds liquid and continuously invested in short term instruments benefiting from the predictable nature of commercial paper while maintaining flexibility in managing cash. For issuers, commercial paper is typically refinanced as it matures by issuing new commercial paper to replace the maturing debt.

This creates a rollover dependency where the issuer depends on the market's willingness to continue financing their short term needs.