Definition of Tax-Exempt Commercial Paper

"Commercial paper" refers to short-term, unsecured, and negotiable notes sold by one company to satisfy immediate cash needs. "Tax-exempt commercial paper" is commercial paper that provides the debt holder (or bondholder) some degree of tax exemption on the earnings from the commercial paper. Non-profit entities, such as universities and hospitals, often issue tax-exempt commercial paper to finance their operations. The government allows them to issue tax-exempt commercial paper to help them finance their operations because these types of entities provide a strong social benefit. With tax-exempt commercial paper, the government does not have to directly fund the university or hospital. Instead, investors fund the entity by earning tax-exempt income when they buy tax-exempt commercial paper.