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Question

Difficulty: MediumMoney Market: Institutions and Instruments

A manufacturing firm in Nigeria needs to borrow short-term working capital for 90 days to purchase raw materials. Which of the following money market instruments is most suitable for the firm to issue directly to investors?

  1. Commercial PaperAnswer
  2. B
    Debenture Stock
  3. C
    Treasury Bill
  4. D
    Development Bond

Answer

Commercial Paper is the correct instrument for a firm seeking short-term working capital directly from investors in the money market.
Commercial Paper is a short-term, unsecured promissory note issued by financially sound corporate organizations to meet immediate operational expenses and working capital requirements in the money market.

Step-by-Step Solution

1
Identify the borrower type and borrowing duration
The borrower is a corporate entity (manufacturing firm) seeking short-term funds (90 days).
The maturity period (90 days) restricts the search to money market instruments, while the issuer type (corporate firm) narrows down the specific instrument.
2
Distinguish between money market and capital market securities
Money market instruments are for short-term financing (under one year), ruling out long-term options like debentures and development bonds.
Capital market securities are designed for long-term capital acquisition.
3
Select the corporate money market instrument
Commercial Paper is issued by creditworthy corporations for short-term working capital, whereas Treasury Bills are issued by government authorities.
Only Commercial Paper meets both criteria of short-term money market maturity and corporate issuance.

Key Concept

Classification and Issuers of Money Market Instruments
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Topics

Money Market: Institutions and Instruments

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