Given below are two statements:
Statement I: Commercial paper is sold at a discount and redeemed at par.
Statement II: Commercial paper is issued to raise short-term funds at higher rates of interest than market rates.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Statement I is correct but Statement II is incorrect.
Statement I: Commercial paper is sold at a discount and redeemed at par. — Correct. The buyer pays less than the face value. On maturity the company repays the full face value, that is, at par.
Statement II: Commercial paper is issued to raise short-term funds at higher rates of interest than market rates. — Incorrect. Commercial paper raises short-term funds at lower rates of interest than market rates. Its issuers are large, creditworthy companies, so they can borrow cheaply.
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.” |