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CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

In the context of financing working capital, which statement about commercial paper (CP) in India is correct?

Commercial paper is an unsecured, short-term money market instrument, usually issued at a discount to face value by creditworthy companies to raise working capital funds. It is not long-term, secured or convertible, and it is different from a bank-accepted trade bill.

  1. AIt is a secured, long-term instrument issued only by banks
  2. BIt is an unsecured, short-term, usually discounted money market instrument issued by creditworthy companiesCorrect
  3. CIt is a convertible debenture repayable after five years
  4. DIt is a bill drawn by a seller and accepted by a bank, always backed by goods

Explanation

Commercial paper is an unsecured promissory note issued at a discount to face value by highly rated companies for short periods, typically up to one year. It is not secured, long-term or convertible, and it is not a trade bill backed by goods.

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