United Financial Corporation is a large, well-known company with an excellent credit rating. Its financial managers project that United Financial will need to obtain some short-term financing in the near future. These same managers believe that interest rates on short-term loans from banks are currently undesirably high. What is one financing option that these financial managers might find attractive?
A) establish a revolving credit arrangement with its banker
B) issue T-bills
C) sell some additional bonds
D) issue commercial paper

Question

Quizplus · Accepted Answer

Issuing commercial paper is a viable financing option that United Financial's financial managers might find attractive. Commercial paper is a short-term unsecured promissory note that corporations issue to raise funds at attractive rates from a broad range of investors. As United Financial is a well-known company with an excellent credit rating, it is likely to obtain better rates on commercial paper that is attractive in the current scenario of high interest rates on short-term loans from banks. Options A and B, revolving credit arrangements with a banker, and issuing T-bills, respectively, are not ideal choices for United Financial. Although both are debt financing methods and can be used to raise short-term funds, T-bills are unique in that they are specifically issued by the US Treasury to fund government operations, while a revolving credit arrangement with a banker may not provide the necessary funds to meet United Financial's needs. Choice C, issuing additional bonds, is a more long-term financing option and may not be appropriate for United Financial if they are seeking short-term financing.

United Financial Corporation Is a Large, Well-Known Company with an Excellent