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High Creditworthiness & Short Term Interest Variance

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a. Why do investors require firms issuing commercial paper to be of high creditworthiness?

b. Why are interest rates on short-term loans not necessarily comparable to each other? Give three possible reasons.

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The solution gives 391 words on why investors look for high creditworthiness and the reasons that interest rates on short-term loans are not necessarily comparable directly. Why interest rates on short-term loans are not necessarily comparable to each other.

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Answer a:

Commercial papers are unsecured financial instruments (having characteristics similar to promissory notes), which are primarily issued by finance companies, banks and large corporations. Commercial papers have a specific due date whereby the holder of the instrument is entitled to receive the amount specified in the document from the issuer of the instrument.

Commercial paper is a discount instrument which implies that the interest earned is the difference between the face value and the discounted purchase price. Yields for commercial papers are calculated using a banker's year of ...

Solution provided by:
Sonia Agarwal, CA
Education
  • Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
  • Bachelor of Commerce, West Bengal University
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