Which one of the following statements about commercial paper is NOT true?Commercial paper issued in the...

Which one of the following statements about commercial paper is NOT true?Commercial paper issued in the United States a. carries an interest rate above the prime rate. b. is virtually always rated by at least one ratings agency. c. has a maximum maturity of 270 days. d. has no secondary market. e. is an unsecured short-term promissory note.

Solutions

Expert Solution

Answer is option a.

In order to find the answer to this question, let us eliminate the true statements, which would be the incorrect options for the question.

Commercial paper is an unsecured short term obligation which has maximum maturity of 270 days in USA. This statement implies option c and e are true and hence not our answers.

Commercial papers are generally bought by investment banks, mutual funds and large conglomerates in order to manage excess liquidity or liability. They generally have lower trading activity post issuance and hence limited or no secondary market. This makes option d also true and hence eliminated.

Commercial papers entail credit risk for investors and hence are evaluated and assigned a credit rating by atleast one credit rating agency. So option b is also true.

Hence option a is the answer, which is not true. Interest rate on commercial paper is generally below the prime rate, which makes them a principal or an attractive short term financing source.

jeff jeffy answered 1 year ago

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