CFA Level I · CFA Level I Exam · Fixed-Income Markets for Corporate Issuers
A company has a backup line of credit from a bank that supports its commercial paper program. The main purpose of this arrangement is most likely to:
A backup line of credit mainly reduces rollover risk. If investors will not buy new paper when old paper matures, the issuer can draw on the bank line to repay. It does not extend maturity limits or turn the paper into secured debt.
- AReduce the risk that the issuer cannot roll over maturing paperCorrect
- BAllow the issuer to extend paper maturity beyond 270 days
- CConvert the paper into secured debt with a claim on collateral
Explanation
A backup line gives liquidity if the market closes and maturing paper cannot be rolled over, which addresses rollover risk and supports credit ratings. It does not change the maturity limit of the paper, and it does not create a collateral claim for paper holders.
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