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Strategies & Market Trends : Booms, Busts, and Recoveries
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To: Oblomov who wrote (10604)10/7/2001 1:03:17 PM
From: Ilaine  Read Replies (1) of 74559
 
Non-financial commercial paper is discounted promises to pay backed by real orders.

For example, a department store orders crystal glasses from a glass factory, to be sold in the china department. They promise to pay upon delivery. The glass factory takes the order to the bank, and sells it to the bank for, say, 95% of face value. The factory uses the money to order supplies and make the payroll. They then make the glass, ship the glass to the department store, and the department store pays the bank.

If commercial paper is outstanding, there are more orders outstanding than are being paid off. But because commercial paper is short term, self-liquidating, that suggests that what is happening isn't defaults but more orders.
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