Which statement about the secondary market for Commercial Paper is generally true?

Which statement about the secondary market for Commercial Paper is generally true?

• A. It has an active secondary market
• B. It is generally not traded and held to maturity
• C. It is only traded through government programs
• D. It trades only in foreign markets

Answer: (B)

Secondary market liquidity for commercial paper tends to be limited. Commercial paper is a short-term instrument issued with very brief maturities and typically in large denominations, and most investors—especially money market funds—prefer to hold it until maturity to avoid price risk in the near term. While a dealer network exists to facilitate some trades, the volume of secondary trading is not high, so CP is generally kept to its original maturity rather than actively traded. This is why the description that it is not traded much in the secondary market and is held to maturity best fits how CP is actually used. The other statements imply a level of market activity or scope (government programs, foreign markets) that doesn’t reflect the common practice for commercial paper.

Secondary market liquidity for commercial paper tends to be limited. Commercial paper is a short-term instrument issued with very brief maturities and typically in large denominations, and most investors—especially money market funds—prefer to hold it until maturity to avoid price risk in the near term. While a dealer network exists to facilitate some trades, the volume of secondary trading is not high, so CP is generally kept to its original maturity rather than actively traded. This is why the description that it is not traded much in the secondary market and is held to maturity best fits how CP is actually used. The other statements imply a level of market activity or scope (government programs, foreign markets) that doesn’t reflect the common practice for commercial paper.