Repo Agreements & Commercial Paper

[BHeng9611]

Hi all,

Refer to the attachment, I dont get why highly rated firm fear investors will run away. Shouldnt it be the other way round? Based on my understanding of commercial paper on investopedia and youtube, commercial papers are unsecured, short term debt instruments issued by firms to pay off any liabilities. Shouldnt investors be the one who are afraid the firms might not able to pay back capital+interest after they purchased debt instruments from the firms? I dont get it.

Seek your kind assistance on this matter.

Thank you in advance,
BX

 

[yLam4028]

The chapter is about vulnerability of commercial paper to financial institution. I think FRM is from perspective of financial institution but not retail like me and you right? The buyer of commercial paper is very sensitive to credit quality of the issuer and they are mainly institutional buyer. As a firm I prefer to fund long term asset by rolling short term liabilities e.g. commercial paper. However during a flight to quality situation I might not able to roll my short term liabilities causing cash flow and liquidity issue. You will come across this in later chapter about liquidity risk.