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FRM Exam Part II · Managing Nondeposit Liabilities

Commercial Paper, Eurodollars and Other Market Funding

Updated 11 October 2026 · Fact-checked

Commercial paper (CP) is short-term unsecured debt, usually under 270 days in the US, sold at a discount. Eurodollars are USD deposits held outside the US. Both are wholesale funding from rate-sensitive, non-insured investors, so they are cheap but can vanish fast in stress. Solve questions by checking tenor, investor base, backstops and rollover risk.

Understand Commercial Paper, Eurodollars and Other Market Funding

Banks fund themselves with insured retail deposits and with nondeposit liabilities raised in wholesale markets. This topic covers the short-term unsecured part: commercial paper, eurodollar deposits, certificates of deposit and similar money-market instruments.

Commercial paper is an unsecured promissory note issued by banks, finance companies and strong corporates. It is sold at a discount to face value and pays face value at maturity. In the US, paper under 270 days avoids SEC registration, so most CP is short, often overnight to a few weeks. Buyers are mainly money market funds, corporate treasurers and other institutional cash investors. Issuers usually hold a backup liquidity line from banks, and rating agencies expect it.

Eurodollars are US dollar deposits at banks outside the US, or at foreign branches of US banks. They sit outside US reserve requirements and deposit insurance. Banks use them as cheap dollar funding. Large time deposits and negotiable CDs are similar: uninsured, sensitive to credit news and priced off benchmark rates plus a credit spread.

Asset-backed commercial paper (ABCP) is issued by conduits that hold longer-term assets such as receivables or mortgages. The conduit funds long assets with short paper, so it has a maturity mismatch. It depends on continued rollover and on liquidity support from a sponsoring bank. If investors stop buying, the sponsor must lend or take assets back onto its balance sheet.

The main risk is rollover (refinancing) risk. Investors are not insured and can simply not reinvest. A freeze in the CP market, as in 2007-2008, forces issuers to draw on credit lines and sell assets. Stress shows up as wider spreads, shorter tenors and falling issuance. Risk managers limit reliance on these sources, diversify investors and tenors, hold buffers and test them in stress scenarios. Under Basel III, the LCR assigns a 100% run-off rate to unsecured wholesale funding from financial institutions that matures within its 30-day stress horizon. Non-operational unsecured funding from non-financial corporates gets a lower run-off rate of 40%. The NSFR gives wholesale funding of under 6 months from financial institutions 0% available stable funding.

Key formulas to remember

CP discount yield
Discount yield = (Face − Price) ÷ Face × (360 ÷ days)
US CP is quoted on a discount basis and a 360-day year. It understates the true return.
CP price
Price = Face × (1 − discount yield × days ÷ 360)
Rearranged from the discount yield. Use it to find the cash raised.
Money market (investment) yield
Yield = (Face − Price) ÷ Price × (360 ÷ days)
Divides by price, not face, so it is higher than the discount yield for the same paper.
Rollover need
Funding gap = maturing wholesale funding − new funding raised
A positive gap must be met from buffers, lines or asset sales.
Key rule
Unsecured + short tenor + uninsured + rate-sensitive investors = high run risk
ABCP adds a maturity mismatch and relies on sponsor liquidity support.

How to solve Commercial Paper, Eurodollars and Other Market Funding questions

Use this order for any question on short-term market funding.

  1. 1Identify the instrument: CP, ABCP, eurodollar deposit, CD or large time deposit.
  2. 2Note the tenor and whether it is secured or unsecured.
  3. 3Identify the investor base: money market funds, corporates, institutions. Insured or not?
  4. 4If a price or yield is asked, pick the right convention: discount yield uses face and 360 days.
  5. 5Check for backstops: backup credit lines, sponsor liquidity support, central bank access.
  6. 6Assess the stress behaviour: rollover risk, spreads, shortening of tenor, concentration.
  7. 7Link to the risk measure or rule, such as LCR outflow treatment, funding concentration limits or stress tests.
  8. 8Pick the answer that fits both the mechanics and the liquidity interpretation.

Quickest way: Four-question screen

When to use it: For conceptual MCQs on funding sources and market freezes.

  1. Is it insured? If not, assume run-prone.
  2. How short is the tenor? Shorter means more frequent rollover.
  3. Is there a mismatch or a backstop? ABCP means mismatch plus sponsor support.
  4. For maths, use discount yield with 360 days; if yield is on price, divide by price.

Common mistakes in Commercial Paper, Eurodollars and Other Market Funding

  • Treating eurodollars as euro-denominated deposits.

    The name suggests the euro currency.

    Fix: Eurodollars are USD deposits held outside the US banking system, regardless of location.

  • Dividing by price when given a CP discount yield.

    Mixing it up with bond yield calculations.

    Fix: Discount yield divides by face value. Only the money market yield divides by price.

  • Using 365 days for CP price calculations.

    Habit from other fixed-income work.

    Fix: US CP uses a 360-day basis unless the question states otherwise.

  • Assuming ABCP is safe because it is backed by assets.

    Confusing collateral with funding stability.

    Fix: ABCP funds long assets with short paper. Its risk is rollover and sponsor liquidity draw, not just asset quality.

  • Thinking a CP backup line removes liquidity risk.

    The line looks like guaranteed cash.

    Fix: A line shifts the risk to the lending banks and can be drawn in stress, straining the bank itself.

  • Saying wholesale investors behave like insured depositors.

    Both are called funding.

    Fix: Uninsured wholesale investors react fast to credit news and have no reason to stay.

Worked examples

Example 1

A company issues USD 10,000,000 face value 90-day commercial paper at a discount yield of 4.8% on a 360-day basis. Find the price and the money market yield.

Show the solution
  1. Price = 10,000,000 × (1 − 0.048 × 90 ÷ 360).
  2. 0.048 × 90 ÷ 360 = 0.012.
  3. Price = 10,000,000 × 0.988 = 9,880,000.
  4. Discount amount = 120,000.
  5. Money market yield = 120,000 ÷ 9,880,000 × 360 ÷ 90.
  6. 120,000 ÷ 9,880,000 = 0.012146.
  7. × 4 = 0.04858, about 4.86%.

Answer: Price is USD 9,880,000 and the money market yield is about 4.86%, higher than the 4.8% discount yield.

Example 2

A bank sponsors an ABCP conduit that holds 5-year receivables and funds them with 30-day paper. Investors stop buying new paper during market stress. Which outcome is most likely? A) The conduit's maturity mismatch disappears. B) The sponsor must provide liquidity support or take assets onto its balance sheet. C) The paper converts to long-term debt automatically. D) Eurodollar deposits fall in value.

Show the solution
  1. The conduit has a maturity mismatch: long assets, 30-day funding.
  2. If investors stop rolling, the conduit cannot repay maturing paper.
  3. Its liquidity facility from the sponsor is then drawn, or assets move back to the sponsor.
  4. A is wrong because the mismatch is structural. C is wrong because paper does not convert on its own. D is unrelated to the scenario.

Answer: B. The sponsor must provide liquidity or absorb the assets, transferring the funding stress to its own balance sheet.

Exam tips

  • Expect scenario questions on a CP freeze: the answer usually involves rollover risk, draws on backup lines and sponsor support.
  • Memorise the discount yield formula and 360-day basis; a calculation is easy marks.
  • Distinguish insured deposits from uninsured wholesale funding when ranking stability.
  • For ABCP, name the maturity mismatch and liquidity support explicitly.
  • Link instruments to Basel III LCR logic: short-term wholesale financial funding runs off heavily in stress.

Practice questions from Managing Nondeposit Liabilities

Commercial Paper, Eurodollars and Other Market Funding in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Commercial Paper, Eurodollars and Other Market Funding: frequently asked questions

What is commercial paper and why do banks use it?

It is short-term unsecured debt sold at a discount. Banks and corporates use it because it is usually cheaper than longer borrowing. The cost is rollover risk, since investors can stop buying.

What are eurodollar deposits?

They are US dollar deposits held at banks outside the US or at foreign branches of US banks. They are uninsured by the US and outside US reserve requirements. Banks use them as wholesale dollar funding.

How does a commercial paper market freeze affect liquidity?

Issuers cannot roll maturing paper, so they draw on backup credit lines, sell assets or seek central bank help. Spreads widen and tenors shorten. Banks that provide the lines then face their own liquidity strain.

Why is asset-backed commercial paper a liquidity risk?

ABCP conduits fund long-term assets with short-term paper. If investors stop rolling, the conduit relies on sponsor liquidity support. This can bring the assets and the funding need back onto the sponsor bank.