Which instrument is used for short-term financing in money markets?

Which instrument is used for short-term financing in money markets?

• A. Common stock
• B. Corporate bonds
• C. Preferred stock
• D. Commercial paper

Answer: (D)

Money markets focus on short-term borrowing and lending of highly liquid, low-risk debt with maturities under a year. Commercial paper fits this purpose because it is unsecured short-term promissory debt issued by corporations to finance working capital and other short-term needs, with maturities typically ranging from a few days up to about 270 days. This makes it ideal for liquidity management and temporary funding in the money markets. Common stock and preferred stock are equity instruments; they do not carry a fixed short-term obligation or maturity, so they don’t serve as money-market financing. Corporate bonds are long-term debt, often with maturities many years out, placing them in the capital markets rather than the money markets. Therefore, the instrument used for short-term financing in money markets is commercial paper.

Money markets focus on short-term borrowing and lending of highly liquid, low-risk debt with maturities under a year. Commercial paper fits this purpose because it is unsecured short-term promissory debt issued by corporations to finance working capital and other short-term needs, with maturities typically ranging from a few days up to about 270 days. This makes it ideal for liquidity management and temporary funding in the money markets.

Common stock and preferred stock are equity instruments; they do not carry a fixed short-term obligation or maturity, so they don’t serve as money-market financing. Corporate bonds are long-term debt, often with maturities many years out, placing them in the capital markets rather than the money markets. Therefore, the instrument used for short-term financing in money markets is commercial paper.