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FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities

A bank treasurer is comparing wholesale funding sources. Which statement best describes a key characteristic of commercial paper (CP) as a funding source for a bank holding company?

Commercial paper is unsecured, short-term debt issued at a discount to institutional investors. Because it matures within months and must be repeatedly rolled over, the issuer is exposed to rollover risk if investors lose confidence, which makes it a runnable and potentially unstable funding source.

  1. AIt is a secured, long-term instrument typically issued with maturities of five to ten years
  2. BIt is an unsecured, short-term discount instrument, so the issuer faces rollover risk if investor confidence fallsCorrect
  3. CIt is an insured deposit that carries no rollover risk because of regulatory guarantees
  4. DIt is a floating-rate instrument that pays coupons quarterly and is sold only to retail investors

Explanation

Commercial paper is unsecured, short-term debt sold at a discount to institutional investors. Because it matures quickly, the issuer must continually roll it over, which exposes it to refinancing risk if credit concerns arise. The long-term, insured, and retail descriptions do not fit CP.

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