Question : Assertion: Commercial paper is a widely used instrument for long-term financing by companies.
Reason: Commercial paper offers high interest rates compared to other money market instruments.
Option 1: Both assertion and reason are true, and the reason is the correct explanation of the assertion.
Option 2: Both assertion and reason are true, but the reason is not the correct explanation of the assertion.
Option 3: Assertion is true, but the reason is false.
Option 4: Assertion is false, but the reason is true.
Correct Answer:
Both assertion and reason are true, but the reason is not the correct explanation of the assertion.
Solution : The correct answer is (b) Both assertion and reason are true, but the reason is not the correct explanation of the assertion.
The assertion is true. Commercial paper is indeed a widely used short-term debt instrument, not long-term, utilized by companies to raise funds to meet their short-term financing needs.
The reason is also true. Commercial paper often offers higher interest rates compared to other money market instruments due to its short-term nature and perceived credit risk associated with the issuing company. However, the reason does not explain why commercial paper is considered a tool for long-term financing. In fact, commercial paper is specifically used for short-term financing needs, typically with maturities ranging from a few days to a few months.
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