Question

Give TWO reasons why the interest rate for a given maturity in the commercial paper market is typically lower than the interest rate for the same maturity in the Eurodollar market.

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

commercial papers are the money market instrument which are popularly used for raising fund from the money market .

i-commercial papers are basically unsecured short term promisary notes which are issued by financial and non financial institutions , only high credit worthy companies are induldulged in it so they are low risky so the rates are low .

ii-the cost of the commercial paper is low relatively to the eurodollar market so the intrest rate is low .

to raising the money for short term period commercial paper market will be the more prefarable than rolling overnight borrowing because the interest rate fluctuation is low and commercial paper are more stable than overnight borrowing .