Which risk is predominantly associated with corporate commercial paper?

Corporate commercial paper is primarily a short-term debt instrument used by corporations to raise funds for operational needs, such as inventory purchases or payroll. The predominant risk associated with commercial paper is credit (default) risk. This refers to the possibility that the issuer of the commercial paper will be unable to meet its obligations to pay interest and repay principal when due.

Since commercial paper is often unsecured and not backed by any collateral, it relies heavily on the creditworthiness of the issuing corporation. If a company encounters financial difficulties, its ability to honor its commercial paper obligations could be compromised, leading to a default. This risk is particularly significant for investors because commercial paper typically has a short maturity and a higher yield than government securities, compensating for the risk of default.

Understanding this context is essential: while operational risk, market risk, and liquidity risk are also relevant in the financial markets, they are not the primary concerns when dealing with corporate commercial paper. Operational risk pertains to failures in a company's operations, market risk involves fluctuations in the overall market affecting the value of securities, and liquidity risk reflects the difficulty of selling an asset without significantly impacting its price. However, for corporate commercial paper, the chief concern remains whether the issuing corporation can repay its debt, therefore highlighting the