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Question

Difficulty: MediumThe Money Market: Operations and Financial Instruments

A manufacturing company requires short-term working capital to finance its raw material inventory for a period of six months. To raise the required funds, the company issues unsecured promissory notes directly to institutional investors. Which of the following financial market instruments is the company using?

  1. Commercial PaperAnswer
  2. B
    Debenture Stock
  3. C
    Treasury Certificate
  4. D
    Ordinary Shares

Answer

Commercial Paper
Commercial Paper is an unsecured, short-term money market instrument issued by corporations to obtain funds for short-term financial obligations such as inventory and payroll.

Step-by-Step Solution

1
Analyze the borrowing entity, duration, and nature of the instrument described in the scenario.
The issuer is a private corporate firm (manufacturing company), the duration is short-term (six months), and the instrument is an unsecured debt promissory note.
Differentiating financial market instruments requires matching the issuer type, maturity length, and underlying security.
2
Identify the appropriate financial market for short-term obligations.
Borrowing for short-term operational needs (under one year) takes place within the money market.
The money market caters to short-term liquidity and working capital requirements.
3
Select the specific money market instrument that corresponds to corporate unsecured short-term borrowing.
Commercial Paper is the instrument issued by corporations to raise short-term funds directly from investors.
Debentures and ordinary shares belong to the capital market, while Treasury Certificates are government borrowing instruments.

Key Concept

Short-term corporate debt instruments in the money market
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Topics

The Money Market: Operations and Financial Instruments

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