What is Commercial Paper?

Commercial paper is a financial instrument issued by corporations to fund operating expenses or current assets. Commercial paper is issued with a fixed interest rate and a maturity date of less than 270 days. Buyers of commercial paper are essentially buying promissory notes that are backed by the financial health of the issuing corporation. The federal government does not insure or implicitly back commercial paper investments. Rates on commercial paper can be higher than other short-term cash instruments, reflecting the default risk and needs of the corporation to quickly raise financing. Mutual funds have a long history of using investments in commercial paper to improve yields on their funds, although the Lehman Brothers bankruptcy in 2008 severely rattled the commercial paper market. Many money market fund managers are now more careful about the commercial paper investments that they make for their money market funds.

 

Investors who enjoy the safety and security of FDIC insurance should remember investing in commercial paper is different than investing in bank deposits. The FDIC does not insure commercial paper investments as they insure deposits made in certificates of deposit, money market accounts and other online savings accounts. Investors can find safety ratings issued by major rating agencies Standard and Poor's and Moody's for commercial paper offerings.

 

The Federal Reserve also tracks commercial paper interest rate indexes which can be useful in comparing commercial paper to other short-term investments. Commercial paper rates are slightly lower this month. This week the Fed is reporting the average for nonfinancial AA-rated commercial paper is 0.20 percent for terms one month, 0.21 percent for 2-month terms and 0.22% for three-month paper. Rates are expected to continue to increase as the US economy improves and companies have an increased need for cash to finance projects, expansion and payroll. Even with rates increasing on commercial paper offerings, the best checking account rates posted on MoneyRates are yielding higher than commercial paper rates.

 

Commercial Paper for Individual Investors

Corporations have been issuing commercial paper for over one hundred years to large investors like banks, mutual funds or brokerage firms. These entities buy commercial paper as an investment or act as a financial intermediary and resell the paper to their customers. Until recently, individual investors have been left out of the commercial paper market unless they used a broker for a private investment placement.

 

The growth of the internet and the increase in online financial transactions has helped motivate a couple of companies to try to sell commercial paper directly to individual investors online. Subsidiaries of Ford Motor Company, General Electric and General Motors have all recently issued short-term notes that can be purchased in small amounts directly online with rates that beat many cash alternatives. Although these accounts resemble a money market account in ways that include the ability to make fund online transfers and write checks, investors are actually investing directly in the debt obligation of a private company with no FDIC protection. Terms and rates can change with market conditions.

 

General Electric Interest Plus

The GE Interest Plus account is an investment in the senior, unsecured corporate debt of the General Electric Capital Corporation. The offering is a direct investment in GE Capital Corporation, which is currently rated AA+ by Standard and Poor's Corporation. The GE Interest Plus account has been offered online for over five years with competitive rates.

 

Today, investment amounts of over $50,000 earn a rate of 1.45% with a compounded yield of 1.46%. The next tiered rate level is for investment amounts between $15,000 and $49,999, which earn a rate of 1.35% and a yield of 1.36%. Investments below $15,000 earn a rate of 1.25% and a yield of 1.26%. The GE Interest Plus account can be linked to your bank checking account for fund transfers and offers unlimited checkwriting. Investors can also use direct deposit to add funds to their account. Investments in the GE Interest Plus Account are not FDIC-insured.

 

Ford Interest Advantage

The Ford Interest Advantage notes issued under the Ford Interest Advantage Program are unsecured debt obligations of Ford Credit. The investments are direct investments in the debt of Ford Credit and are not insured by the FDIC. The Ford Interest Advantage account can be opened with as little as $1,000 and offers free online transfers to other personal accounts and automatic direct deposits.

 

The interest rate earned by the investment is based on the amount invested. The top tier for investments over $50,000 earn a rate of 1.85% with a corresponding yield of 1.87%. Investments between $15,000 and $49,999 earn a rate of 1.70% and a yield of 1.71%. Amounts under $15,000 earn a rate of 1.55% and a yield of 1.56%. The Ford Interest Advantage account has online access and account information can be downloaded into Quicken, QuickBooks, or Microsoft Money. The account requires a daily minimum balance of $1,000. Investments in the Ford Interest Advantage Account are not FDIC-insured

 

Ally Demand Notes

Ally Financial Inc. is the new name created in 2010 for the company once known as General Motors Acceptance Corporation (GMAC). One of the world's largest auto loan underwriters in the US, Ally Financial is now a global company specializing in many financial products including commercial paper.

 

Demand Notes issued by Ally Financial can be purchased for as little as $1,000 for all employees and retirees of Ally/General Motors Company/GMAC and subsidiaries, as well as their immediate family members (spouse, children, parents, siblings and grandparents of the employee or retiree); GM dealers and their employees; and GM stockholders and suppliers. Features of Demand Notes include online fund transfers, unlimited checkwriting and an interest rate currently set at 2.25%. Demand Notes are unsecured debt obligations of Ally Financial Inc. and are not FDIC-insured.

 

Chevron Commercial Paper

Chevron Corp. is offering notes with terms between 1 days and 270 days that are rated A-1+ by Standard & Poor's. The Chevron notes cannot be purchased directly online, but individual investors can contact their investment advisor or bank to purchase Chevron commercial paper. Rates change daily with market conditions. Interest rates change daily

 

American Express Commercial Paper

American Express Credit Corporation offers commercial paper currently rated A-2 by Standard and Poor's directly to corporate investors and institutional investors. Maturities are available from 1 to 270 days. The minimum initial investment is $100,000. Accounts can be opened electronically via Bloomberg, online at STN Money Markets or by contacting American Express Credit Corporation. Individual investors are required to purchase American Express commercial paper from a broker.

 

Last Updated: 11/15/10

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