What kind of instrument is commercial paper classified as?

What kind of instrument is commercial paper classified as?

• A. Secured debt instrument
• B. Negotiable, unsecured debt instrument
• C. Long-term equity instrument
• D. Preferred stock

Answer: (B)

Commercial paper is classified as a negotiable, unsecured debt instrument. This means that it is a short-term borrowing tool used by companies to meet immediate financial needs, such as funding working capital requirements. Being negotiable indicates that commercial paper can be easily transferred between parties before maturity, providing liquidity to investors. As an unsecured debt instrument, it is not backed by any collateral, which reflects the borrower's creditworthiness and reputation rather than any specific assets. This classification is crucial as it defines the nature of the investment and the associated risks; investors must rely on the issuer's credit quality, as there is no collateral backing to safeguard the investment. In contrast, secured debt instruments are backed by specific collateral, long-term equity instruments involve ownership in a company and typically represent a longer commitment than the short-term nature of commercial paper, and preferred stock is a type of equity that often pays fixed dividends but does not fall under the category of debt instruments.

Commercial paper is classified as a negotiable, unsecured debt instrument. This means that it is a short-term borrowing tool used by companies to meet immediate financial needs, such as funding working capital requirements.

Being negotiable indicates that commercial paper can be easily transferred between parties before maturity, providing liquidity to investors. As an unsecured debt instrument, it is not backed by any collateral, which reflects the borrower's creditworthiness and reputation rather than any specific assets. This classification is crucial as it defines the nature of the investment and the associated risks; investors must rely on the issuer's credit quality, as there is no collateral backing to safeguard the investment.

In contrast, secured debt instruments are backed by specific collateral, long-term equity instruments involve ownership in a company and typically represent a longer commitment than the short-term nature of commercial paper, and preferred stock is a type of equity that often pays fixed dividends but does not fall under the category of debt instruments.