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CA Intermediate · Financial Management and Strategic Management · Types of Financing

A company raises funds by issuing commercial paper in India. Which of the following statements about commercial paper is correct?

Commercial paper is an unsecured, short-term money market instrument. It is issued at a discount to face value and redeemed at par, and the difference is the return to the investor. It is not secured, long-term debt, preference capital or a bank term loan.

  1. AIt is a secured, long-term debt instrument issued only to individuals
  2. BIt is an unsecured, short-term money market instrument issued at a discount and redeemed at face valueCorrect
  3. CIt is a convertible preference share that carries a fixed dividend
  4. DIt is a medium-term loan from a bank repayable in instalments

Explanation

Commercial paper is an unsecured promissory note issued by creditworthy companies to raise short-term funds. It is issued at a discount to face value and redeemed at par, so the discount is the investor's return. The long-term secured description fits debentures, not commercial paper.

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