Series 7 Exam Question 406: Answer and Explanation

Question: 406

Which of the following is characteristic of commercial paper?

• A. It is quoted as a percent of par.
• B. It is proof of ownership of the corporation.
• C. It is issued to raise capital for a corporation.
• D. It is junior to convertible preferred stock.

Correct Answer: C

Explanation:

C. Commercial paper is generally issued for the purpose of raising capital for a corporation. Choice (A) is incorrect because commercial instruments are not quoted as a percent of par. Choice (B) is incorrect because a commercial instrument is proof of a debt, not ownership. Choice (D) is incorrect because commercial instruments are a debt security; therefore, if a claim is filed against the issuing corporation, the commercial instrument holds a senior position to preferred stock.