Short-Term Paper: What It is, How It Works (2024)

What Is Short-Term Paper?

Short-term paper refers broadly to fixed-income securities that typically have original maturities of less than nine months. Short-term paper is usually issued at a discount and provides a relatively low-risk financing alternative for companies, governments, or other organizations to fund normal operations.

Key Takeaways

  • Short-term paper is a broad category of unsecured, but relatively safe, debt with maturities that range from 90 days to nine months.
  • Short-term paper is sold at a discount and then repaid at par value instead of paying regular interest or a coupon.
  • Examples of short-term papers include commercial paper, short-term Treasuries, and promissory notes.
  • Investors rely on depositing funds in short-term paper as it is a better source of return than cash but at the same time allows for funds to be easily accessible if needed.
  • Short-term paper is issued by governments, corporations, and financial institutions.

Understanding Short-Term Papers

Short-term papers are negotiable debt instruments that are usually unsecured, but which may also be backed by assets such as securities or loans issued by a corporation. These financial instruments are sometimes considered part of the money market and are almost always issued at a discount to par and then repaid at face value upon maturity.

The difference between the purchase price and the face value of the security represents the return on investment for the holders. For the issuer, this difference represents the cost of financing the loan security. The debt security can also be issued as an interest-bearing security.

Examples of short-term paper include U.S. Treasury bills and negotiable instruments issued by financial and non-financial entities, such as commercial paper, promissory notes, and bills of exchange.

In the case of U.S. Treasury bills, the papers are backed by the full faith and credit of the U.S. government and are, thus, considered the safest investments because the government cannot default.

Investing and Issuing Short-Term Papers

Short-term papers are usually issued with a minimum denomination of $25,000. This means that the main investors of these securities are institutional investors who seek short-term vehicles to deposit their cash temporarily.

Given that short-term papers are a better alternative to holding cash in a bank account because they provided a return as opposed to cash, investors find them an attractive opportunity. Mutual funds, for instance, invest heavily in short-term paper due to their relative safety and high liquidity.

The majority of financial institutions rely on being able to roll over short-term paper for their day-to-day financing needs. During the U.S. financial-market meltdown of 2008, institutions essentially halted issuing short-term paper and the U.S. government had to intervene to provide liquidity for corporations caught without the means to finance operations.

Issuers of Short-Term Papers

Short-term paper is issued by a variety of entities, including governments, corporations, and financial institutions as they are a common form of financing the daily operations of any entity. It is a simpler form of financing than having to obtain a loan from a bank, for example. They are also easy to set up and don't require much information to be disclosed.

The issued paper is rated by a rating agency, such as , so investors understand the risk of the entity they are purchasing the short-term paper from.

Structured investment vehicles (SIV) that invest in long-term assets finance those assets by selling short-term paper with an average maturity of 90 days or less. The paper can be backed by a pool of mortgages or loans used for collateral and is, hence, referred to as short-term asset-backed paper. In the case of default, investors of the asset-backed paper can seize and sell the underlying collateral assets.

Commercial paper is a commonly used type of unsecured, short-term paper issued by corporations, typically used for the financing of payroll,accounts payable,and inventories, as well as meeting other near-term liabilities. Maturities on commercial paper typically last several days, and rarely range longer than 270 days. Commercial paper is usually issued in larger denominations, typically $100,000.

It is not uncommon for issuers to adjust the amounts and/or the maturities of papers to suit the investment needs of a particular buyer or group of buyers. Investors can purchase short-term paper directly from the issuer or through dealers who act as intermediaries between the issuer and the lender.

Short-Term Paper: What It is, How It Works (2024)

FAQs

What is a short term paper? ›

Short-term paper is a broad category of unsecured, but relatively safe, debt with maturities that range from 90 days to nine months. Short-term paper is sold at a discount and then repaid at par value instead of paying regular interest or a coupon.

How do short-term notes work? ›

Short term notes, also known as promissory notes, are debt securities with a maturity of one year or less. They are issued by borrowers who need short-term financing and are typically used for working capital, inventory purchases, or to bridge gaps in cash flow.

What is considered short-term note? ›

Short-term notes are usually debts that a business must repay within a year. This financing option can be implemented when a business requests a period of fewer repayments because times may be tough or interest rates may be high.

Are short-term notes safe? ›

Short Term Notes carry the risk that an investment opportunity financed by Short Term Notes could default before it becomes fully subscribed.

How to write a short term paper? ›

How do I write a term paper?
  1. 1 Developing ideas. The first step of writing a term paper is brainstorming to come up with potential topics and then selecting the best one. ...
  2. 2 Preparation (research) ...
  3. 3 Outline. ...
  4. 4 First draft. ...
  5. 5 Editing and proofreading.
Dec 4, 2023

How to write a short paper? ›

Keep the introduction and conclusion under 75 words each.

Resist this temptation, and keep these paragraphs brief. The intro should contain no more than 6-7 sentences, and the conclusion only needs 3-4 sentences. The intro should explain the topic, give your thesis, and let readers know why the topic matters.

How long is a short term note? ›

A short-term note payable is a debt created and due within a company's operating period (less than a year).

What is short term vs long term note? ›

Long-term note payables are loans that are payable in more than one year. Short-term note payables are loans that are payable in one year or less. Long-term note payables usually have lower interest rates than short-term notes, because they involve a longer commitment from the borrower.

What is the difference between a short term note and a long term note? ›

Short-term Notes Payable: These have repayment terms of less than one year. They are often used for working capital needs or to finance seasonal operations. Long-term Notes Payable: These have repayment terms of more than one year. They are typically used for financing long-term assets, mergers, or acquisitions.

What are the types of short term notes payable? ›

Loans may be short term, due to be repaid by the business within one year. These are current liabilities. There are two types of short-term notes payable: interest bearing and discounted.

Are short-term notes payable? ›

Short-term notes payable (often simply referred to as “notes payable” when the context is clear) are promissory notes that represent amounts a company or individual has borrowed and must repay within one year or within the company's operating cycle, whichever is longer. They are a type of short-term liability.

How do I buy short term notes? ›

You can buy them from the government directly, and many buy them through a brokerage, retirement or bank account. Treasury owners pay federal taxes on the investment interest earned but no state or local taxes.

Is a short term note a liability? ›

Short term notes payable are classified as current liabilities on a company's balance sheet, which can make the business look less liquid, since more obligations are coming due for payment in the short term.

Is a short term note an asset? ›

Like accounts receivable, notes receivable are recorded as an asset because they represent monetary value that the business expects to collect. They will be considered short-term assets if they can be expected to be collected in full within twelve months or less.

How long is a short paper? ›

Short papers are up to 6 pages (in single column format) in length plus the bibliography.

How many words is a short paper? ›

Short papers are generally less than 1500 words.

How many pages is a term paper? ›

A term paper is a longer type of research-based homework on a particular topic. Term papers range from 15 to 25 pages because any less is considered lazy and any more is too much for any professor to read (trust me, I teach at a university).

What is considered a term paper? ›

Term papers are generally intended to describe an event, a concept, or argue a point. It is a written original work discussing a topic in detail, usually several typed pages in length, and is often due at the end of a semester. There is much overlap between the terms: research paper and term paper.

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