ACCA Financial Management (F9) Certification Practice Exam

Which of the following describes Commercial Paper?

1. Long-term investment vehicle for retail investors

2. Short-term unsecured debt issued by large corporations

3. Guaranteed deposits from financial institutions

4. Government securities with high liquidity

The correct answer is: Short-term unsecured debt issued by large corporations

Commercial paper is a type of short-term unsecured debt instrument that is issued by large corporations to finance their immediate financial needs, such as inventory purchases or operating expenses. This financial tool typically has maturities that range from a few days up to 270 days, making it a viable option for companies looking to manage their short-term cash flow without resorting to more expensive short-term loans. Because it is unsecured, it is generally issued by corporations with high credit ratings, which reduces the risk for investors. In contrast, the other options present different financial instruments which do not align with the characteristics of commercial paper. For example, long-term investment vehicles cater to retail investors and involves more extended maturities, while guaranteed deposits usually refer to savings or time deposits at financial institutions, offering security rather than being a debt instrument. Government securities, on the other hand, are typically backed by the government and focused on longer-term financing, instead of fulfilling immediate cash needs like commercial paper does.