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CFA Level I · CFA Level I Exam · Fixed-Income Markets for Corporate Issuers

A corporation relies heavily on commercial paper and keeps a backup line of credit with a bank. The main reason for the backup line is most likely to:

The backup line most likely provides liquidity if the issuer cannot roll over maturing commercial paper. Because the paper is short term and must be refinanced, a bank line covers rollover risk and also supports the issuer's credit rating. It does not eliminate the discount or extend maturity.

  1. Areduce the discount rate to zero
  2. Bprovide liquidity if the paper cannot be rolled overCorrect
  3. Callow the paper to mature after ten years

Explanation

Commercial paper must be refinanced as it matures, so rollover risk exists if markets tighten or credit quality falls. A backup line supplies cash to repay maturing paper. It does not set the discount rate to zero, nor lengthen the maturity of the paper.

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