[Sankaranarayanan SParticipant]

Below is one of the blue box questions in “Fixed-Income Segments, Issuers, and Investors” module:
A corporate issuer seeking to fund working capital needs would <

Below is one of the blue box questions in “Fixed-Income Segments, Issuers, and Investors” module:
A corporate issuer seeking to fund working capital needs would most likely issue:

1. commercial paper.
2. intermediate-term debt.
3. long-term debt.

In the blue box, it says “Option 2”, which is “intermediate-term debt”, correct.

However, working capital is generally less than 1 year in nature, therefore commercial paper should be the right answer. But why does Blue Box categorise it as intermediate-term debt when it is usually more than 1 year?

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• This topic was modified 1 month ago by Sankaranarayanan S.
• This topic was modified 1 month ago by Sankaranarayanan S.

[Madhu Chandarasekaran, CFAKeymaster]

Hi,

This is about what the issuer is likely to do and not necessarily from the point of matching of maturities.

If the working capital requirement is not purely seasonal but a continuing requirement

Hi,

This is about what the issuer is likely to do and not necessarily from the point of matching of maturities.

If the working capital requirement is not purely seasonal but a continuing requirement, issuers often use intermediate‑term debt to avoid excessive rollover and liquidity risk. CP might be aggressive and Equity or LT debt way too expensive. So,

• A company that is constantly rolling over short‑term paper to finance permanent working capital runs into rollover risk.

• To reduce rollover risk, many issuers term out some portion of their working capital financing into intermediate‑term debt (1–5 years) rather than purely relying on short-term paper.

Hope this helps.

 

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[Aishwarya chockalingamParticipant]

<p class=”cfa-stem”>Using the following US Treasury spot rates, the arbitrage-free value of a two-year $100 par value Treasury bond with a 6% coupon rate, paid semi-annually, is 

<p class=”cfa-stem”>Using the following US Treasury spot rates, the arbitrage-free value of a two-year $100 par value Treasury bond with a 6% coupon rate, paid semi-annually, is closest to:</p>

<table class=”table-style1″ border=”1″>
<thead>
<tr>
<td>Period</td>
<td>Years</td>
<td>Spot Rate (Annualized)</td>
</tr>
</thead>
<tbody>
<tr>
<td>1</td>
<td>0.5</td>
<td>1.60%</td>
</tr>
<tr>
<td>2</td>
<td>1.0</td>
<td>2.20%</td>
</tr>
<tr>
<td>3</td>
<td>1.5</td>
<td>2.70%</td>
</tr>
<tr>
<td>4</td>
<td>2.0</td>
<td>3.10%</td>
</tr>
</tbody>
</table>

1. <span class=”sr-only”>A.</span>$99.75.
2. <span class=”sr-only”>B.</span>$105.65.
3. <span class=”sr-only”>C.</span>$107.03.

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