CFA Level I · CFA Level I Exam · Working Capital and Liquidity
A company needs short-term funding and is comparing a bank line of credit with commercial paper. Compared with a bank line of credit, commercial paper is most likely:
Commercial paper is most likely a cheaper source of funds for firms with strong credit ratings. It is unsecured short-term debt sold to investors, so only creditworthy issuers can use it, and those issuers usually pay less than they would on a bank line of credit.
- Aavailable to firms of any credit quality
- Ba cheaper source for firms with strong credit ratingsCorrect
- Csecured by a pledge of the firm's receivables
Explanation
Commercial paper is unsecured and issued mainly by large, highly rated firms, which lets them borrow at lower rates than bank lines. It is not available to weak credit firms, and it is not secured by receivables.
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