Question 40

A short-term debt security issued by large banks and corporations

Commercial paper is defined as a short-term debt security that is typically issued by large banks and corporations to finance their immediate financial needs. This type of instrument usually has maturities that do not exceed 270 days.

A) A short-term debt security issued by large banks and corporations

This option accurately defines commercial paper, as it highlights the essential characteristics of being a short-term debt instrument utilized by major financial entities. It conveys both the purpose and the typical issuer of such securities.

B) A long-term money order issued by a central bank

This option is incorrect because it describes a long-term instrument, whereas commercial paper is specifically a short-term debt security. Additionally, a money order is a different financial instrument altogether and is not typically issued by central banks.

C) A short-term money draft issued by Federal Reserve Bank

While this option mentions a short-term financial instrument, it incorrectly attributes the issuance to the Federal Reserve Bank. Commercial paper is not issued by the Federal Reserve but rather by corporations and banks in the private sector.

D) A long-term bond issued by state banks and credit unions

This option is incorrect as it describes a long-term bond, which is fundamentally different from commercial paper. Bonds are typically issued for longer durations and serve different financial purposes than the short-term nature of commercial paper.

Conclusion

The correct answer, A, is the only option that accurately captures the essence of commercial paper as a short-term debt security issued by significant financial institutions. All other options fail to reflect the accurate characteristics of commercial paper, either by misrepresenting the duration, the type of issuer, or the nature of the financial instrument itself.