Question

A finance company wishes to raise money so that it can make (potentially) profitable loans. Is it more likely to use the RP market (rolling over overnight borrowing) or the commercial paper market (rolling over 90-day borrowing) to do so? Explain.

Answer 1

Answer)

If a bank wants to raise money to make profitable loans, it will definitely issue commercial paper.

Commercial papers are issued at discount and paid at par after the tenure period.

But in case of rolling overnight borrowing, these are overnight borrowing from another bank and these are paid next day according to the federal regulations.

Since commercial papers are issued for a longer period then the company have more opportunity to issue it a higher interest rate.