Commercial paper is issued by ______ to raise short-term funds at ______ rates of interest than market rates.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → large and creditworthy companies; lower
Option (1) commercial banks; lower — Incorrect. The rate part is right, but the issuer is wrong. Commercial banks issue certificates of deposit; commercial paper comes from large companies.
Option (2) large and creditworthy companies; higher — Incorrect. The issuer is right, but the rate is wrong. These companies are financially strong, so they borrow at lower rates than market rates.
Option (3) large and creditworthy companies; lower — Correct. Commercial paper is issued by large and creditworthy companies. Being financially strong, they raise short-term funds at lower rates of interest than market rates.
Option (4) commercial banks; higher — Incorrect. Both parts are wrong. The issuers are large companies, and the rates are lower than market rates.
NCERT (Pre-rationalised Edition): “2. Commercial Paper: Commercial paper is a short-term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy companies to raise short-term funds at lower rates of interest than market rates. It usually has a maturity period of 15 days to one year. The issuance of commercial paper is an alternative to bank borrowing for large companies that are generally considered to be financially strong. It is sold at a discount and redeemed at par. The original purpose of commercial paper was to provide short-terms funds for seasonal and working capital needs. For example companies use this instrument for purposes such as bridge financing.” “4. Certificate of Deposit: Certificates of deposit (CD) are unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and development financial institutions. They can be issued to individuals, corporations and companies during periods of tight liquidity when the deposit growth of banks is slow but the demand for credit is high. They help to mobilise a large amount of money for short periods.” |