What characterizes commercial paper as an investment?

Commercial paper is characterized as an unsecured short-term note issued by large corporations to finance short-term liabilities. It is typically used as a means for these corporations to obtain quick and inexpensive funding for various immediate business needs, such as inventory purchases or accounts payable.

The nature of commercial paper being unsecured means that it is not backed by any physical asset or collateral, which distinguishes it from secured notes that are backed by specific assets of the issuer. The fact that it is primarily issued by large, financially stable corporations allows investors to perceive these instruments as relatively low-risk despite lacking collateral.

Investors are drawn to commercial paper because it offers a higher yield compared to government securities or Treasury bills while maintaining a relatively short maturity period, typically ranging from a few days to a maximum of 270 days. This short duration minimizes exposure to interest rate fluctuations and credit risk.

The other options do not accurately represent commercial paper; for instance, secured notes would imply some form of collateral backing, which is not the case with commercial paper. Long-term obligations do not fit as commercial paper is distinctly intended for the short-term market, and guarantees by banks are not a characteristic of standard commercial paper, which is typically solely the responsibility of the issuing corporation.