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Why do many big companies use commercial paper rather than short-term bank loans?
AIts rate is usually below bank rates
BIts rate is usually above bank rates
CIt never has to be repaid at all
DIt can be issued without a maturity
Answer & Solution
Correct answer: A. Its rate is usually below bank rates
1. Commercial paper is issued by financially strong corporations, so investors accept a lower yield on it.
2. The interest rate on it is usually 1 to 3 percent below bank rates.
3. That saving is why many big companies use it instead of short-term bank loans.
4. It is still debt with a stated maturity, so the claim that it never has to be repaid inverts the instrument entirely.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 16 "Understanding Financial Management and Securities Markets", section 16.3 Obtaining Short-Term Financing_
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