CFA Level I · CFA Level I Exam · Fixed-Income Issuance and Trading
Which feature most accurately distinguishes commercial paper issued by a large corporation from a repo as a source of short-term funding?
Commercial paper is typically unsecured, so investors rely on the issuer's credit quality, and issuers often keep a backup credit line to cover rollover risk. A repo, by contrast, is a collateralized loan with a repurchase price.
- ACommercial paper is typically unsecured and relies on the issuer's credit quality, often with a backup credit lineCorrect
- BCommercial paper is always collateralized by government securities pledged to the lender
- CCommercial paper requires the issuer to repurchase the paper at a higher price on a set date
Explanation
Commercial paper is usually unsecured, so investors depend on the issuer's creditworthiness, and issuers commonly hold backup lines of credit to reduce rollover risk. A repo is collateralized and involves a repurchase at a higher price, which describes options B and C incorrectly for commercial paper.
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