That means that the company has to pay back the money borrowed within a very short period of time.However, most companies who are using commercial paper regularly will just issue new commercial paper to raise the money to retire maturing paper.
Moody's, Standard & Poor's and other rating agencies determine the credit rating of companies.
Institutional investors buy the commercial paper solely on the credit worthiness of the company, with the understanding that the company will buy back the paper with interest at the maturity date. is a large public company with a credit rating of AAA. It decides to issue paper for $200 million with a 4% interest rate with a 30-day maturity.
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SSAB's funding is focused on supporting the Group’s strategy and covering the needs for financing within the framework of the Group's financial policy.
The funding is primarily executed through the parent company.
If its credit rating is downgraded, the cost/interest rate for its paper will increase, and the company could be excluded from selling commercial paper.
Commercial paper usually is issued with maturity dates between 30 days and 270 days.
Commercial paper has slightly higher interest rates than bank loans, but the company has no registration requirements and the paper is sold to large institutional buyers, like large financial institutions, hedge funds and multinational corporations.
Since the paper is unsecured, the companies do not have to pledge accounts receivables and inventories as collateral, which they would have to do with a line of credit. To be able to issue commercial paper, a company has to have the highest credit rating, either AAA or Aaa.