Question

Commercial paper is supposed to be low risk. Our financial system depends on companies being willing to lend one another funds to cover short-term deficits. In 2008, lots of companies wanted to sell bonds—they needed cash quickly—but virtually none were willing to buy them, fearful that the bonds would be worth nothing the next day.

If you were a company executive during September 2008 tasked with covering the short-term financial needs of your company, please answer the following questions in detail:

What would your solution have been?

What if you were (on the other end) with excess funds that you would normally lend to a company facing a short-term deficit?

Would you have made that loan?

What ethical considerations would there be on both sides?

Answer 1

SOLUTION:-

Commercial paper is supposed to be low risk and bond markets are supposedly safest form of investments. 2008 crisis which gave a major jolt to the modern economies around the world was followed by liquidity crisis and massive cash crunch.

• In such a situation covering short term financial needs and fixed costs would require liquidating the debt assets.
• It would be a logical choice to find buyers for debt assets but in a situation of extreme panic and uncertainty it's not surprising that people and firms would be unwillong to invest their liquid cash unsure of what the market scenario would look like in the future.
• As an executive trying to find buyers for my short term commercial papers and would look for big investors with surplus funds who are more likely to invest, the other ways would be to sell these bonds to the government or gain credit by using these assets as collaterals.
• As an investor with excess funds I would be very selective and dependent on the instrument's past performance and future prospects.

The ethical considerations on both sides are with respect to the riskness of the asset being traded from the seller's side abd what premium the investor is paying after knowing the pris and cons of possessing the asset. The selker might under play the riskness to make it more attractive and the buyer is more likely to underpay given the market situation

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