A company needs long-term finance to buy some machinery. In order to raise the long term funds in the capital market, the company will have to incur huge floatation costs within the next two months. The company decided to raise the funds to meet floatation costs by issuing an unsecured promissory note, transferable by endorsement with a fixed maturity period. The instrument the company has issued is:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Commercial Paper
Option (1) Call Money — Incorrect. Call money is short-term finance repayable on demand, used by banks to borrow from one another for one to fifteen days.
Option (2) Treasury Bill — Incorrect. A treasury bill is issued by the RBI on behalf of the Government of India. A company cannot issue it.
Option (3) Commercial Bill — Incorrect. A commercial bill is a bill of exchange drawn by a seller on a buyer to finance a credit sale. It is not an unsecured promissory note issued to raise funds.
Option (4) Commercial Paper — Correct. Commercial paper is a short-term unsecured promissory note, transferable by endorsement, with a fixed maturity. Large, creditworthy companies issue it. When the funds are used to meet the floatation costs of a long-term issue, it is called bridge financing.
Note: Although the chapter ‘Financial Markets’ was dropped from the NCERT textbooks during rationalisation, it has stayed in the NTA syllabus every year since 2022, except for 2025, and it is part of the syllabus again from 2026. This question is therefore based on the pre-rationalised NCERT, an extract from which is given below.
NCERT (Pre-rationalised Edition):
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