Certified Management Accountant Practice Exam 2025 - Free CMA Practice Questions and Study Guide

Commercial paper is characterized as an unsecured note sold by highly creditworthy firms. This means that these firms issue short-term debt instruments to meet their immediate financing needs, typically for working capital. Since commercial paper is unsecured, it is not backed by any collateral; instead, it relies solely on the creditworthiness of the issuing company.

The firms that issue commercial paper generally have strong credit ratings, which allows them to borrow funds at a lower cost compared to riskier issuers. The maturity of commercial paper is usually short, ranging from a few days to up to 270 days, making it an attractive option for companies looking for quick liquidity without the need to secure the debt with specific assets.

In contrast, the other options do not accurately describe commercial paper. Secured notes, such as bonds, involve collateral backing and are not typically vibrant in the commercial paper market. Long-term bonds differ significantly in terms of maturity and security features. Equity securities, on the other hand, represent ownership in a company and involve dividends but do not fall under the category of debt instruments like commercial paper. Thus, the defining feature of commercial paper—that it is an unsecured note from highly creditworthy firms—distinguishes it from other financial instruments.