CFA Level I · CFA Level I Exam · Working Capital and Liquidity
A treasurer compares a 90-day Treasury bill with a 90-day commercial paper issue from a highly rated corporation. Compared with the Treasury bill, the commercial paper most likely offers:
Commercial paper most likely offers a higher yield than a Treasury bill of the same maturity. It carries issuer credit risk and is less liquid, so investors demand a spread over the risk-free government security as compensation.
- Aa lower yield because it is unsecured
- Ba higher yield as compensation for credit and liquidity riskCorrect
- Cthe same yield because both mature in 90 days
Explanation
Commercial paper is an unsecured corporate obligation with a thinner secondary market than government bills. Investors therefore require a spread over the Treasury bill yield. Equal maturity does not remove credit or liquidity differences.
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