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Which money market instrument is ABC Corporation likely to consider for raising funds to meet its short-term working capital needs?
- a)Call Money
- b)Treasury Bills
- c)Commercial Paper
- d)Repo
Correct answer is option 'C'. Can you explain this answer?
Verified Answer
Which money market instrument is ABC Corporation likely to consider fo...
ABC Corporation, facing seasonal working capital needs, can consider issuing Commercial Paper as a money market instrument to raise short-term funds from institutional investors. Commercial Paper is well-suited for corporations looking to meet temporary funding requirements during periods of increased business activity.
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Which money market instrument is ABC Corporation likely to consider fo...
Overview of Money Market Instruments
Money market instruments are short-term financial instruments used for borrowing and lending funds, typically with maturities of one year or less. ABC Corporation, looking to raise funds for short-term working capital needs, has several options available.
Why Commercial Paper is the Best Option
Among the options provided, Commercial Paper (CP) is the most suitable choice for ABC Corporation. Here’s why:
Comparison with Other Instruments
Conclusion
In summary, Commercial Paper stands out as the best option for ABC Corporation to efficiently meet its short-term working capital needs due to its flexibility, cost-effectiveness, and suitability for unsecured funding.
Money market instruments are short-term financial instruments used for borrowing and lending funds, typically with maturities of one year or less. ABC Corporation, looking to raise funds for short-term working capital needs, has several options available.
Why Commercial Paper is the Best Option
Among the options provided, Commercial Paper (CP) is the most suitable choice for ABC Corporation. Here’s why:
- Short-Term Financing: CP is specifically designed for short-term needs, with maturities ranging from a few days to up to 270 days, making it ideal for meeting working capital requirements.
- Unsecured Instrument: Unlike bank loans, CP is an unsecured promissory note. This means ABC Corporation can raise funds without providing collateral, which is beneficial for companies with strong credit ratings.
- Cost-Effective: Issuing CP can be more cost-effective than traditional bank loans. The interest rates are typically lower, especially for companies with good credit ratings, thus reducing financing costs.
- Flexibility: CP provides flexibility in terms of the amount raised and the duration, allowing ABC Corporation to tailor its funding to specific short-term needs.
Comparison with Other Instruments
- Call Money: This is a very short-term borrowing option, typically used by banks. It may not be suitable for a corporation like ABC.
- Treasury Bills: While T-Bills are safe investments, they are not a direct means for corporations to raise funds.
- Repo: Repurchase agreements are also short-term but are mainly used by financial institutions rather than corporations for routine funding needs.
Conclusion
In summary, Commercial Paper stands out as the best option for ABC Corporation to efficiently meet its short-term working capital needs due to its flexibility, cost-effectiveness, and suitability for unsecured funding.
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Which money market instrument is ABC Corporation likely to consider for raising funds to meet its short-term working capital needs?a)Call Moneyb)Treasury Billsc)Commercial Paperd)RepoCorrect answer is option 'C'. Can you explain this answer?
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