Examkin

Question

Difficulty: HardMoney Market: Institutions and Instruments

To bridge a temporary 90-day shortfall in working capital, a reputable private corporation issues an unsecured promissory note directly to institutional investors. Which financial instrument is being utilized, and which market segment does it belong to?

  1. Commercial paper, which is a short-term money market instrument.Answer
  2. B
    Corporate debenture, which is a short-term money market instrument.
  3. C
    Treasury bill, which is a private corporate debt instrument in the capital market.
  4. D
    Development stock, which is a short-term money market instrument.

Answer

Commercial paper, which is a short-term money market instrument.
Commercial paper is an unsecured, short-term promissory note issued by financially sound corporations to raise short-term funds for operational requirements like working capital. Because its maturity period is under one year (in this case, 90 days), it is traded exclusively within the money market.

Step-by-Step Solution

1
Analyze the borrowing duration and issuer profile
The instrument maturity is 90 days (short-term, under one year) and the issuer is a private corporation seeking working capital.
Money market instruments cater to short-term borrowing needs (maturity under one year), whereas capital market instruments cater to long-term financing.
2
Differentiate between short-term instruments based on issuer type
Unsecured short-term promissory notes issued by private corporate firms are classified as commercial papers.
Treasury bills are short-term instruments issued by government monetary authorities, while commercial papers are corporate short-term debt.
3
Confirm financial market classification
Commercial papers are traded in the money market.
The money market handles short-term financial assets, distinguishing it from the capital market which deals with long-term securities like debentures and development stocks.

Key Concept

Classification of Money Market Instruments vs Capital Market Instruments
Estimated Time:1m 30s
Rate this question

Topics

Money Market: Institutions and Instruments

More questions from this topic