Exam 21: Mergers, Acquisitions, and Corporate Control

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Maturities: Commercial paper can have maturities up to 270 days, but is often considerably less.Repurchase agreements are often made for only a few days, but can be arranged for longer, or can simply be rolled over without difficulty.
Liquidity: Many issues of commercial paper will be illiquid prior to maturity.Repurchase agreements may also be illiquid, but the purchaser typically has more flexibility in setting the initial maturity.
Security: Commercial paper is unsecured, but is issued only by high-credit quality corporations.It is also rated for default risk.Repurchase agreements are collateralized by Treasury Bills of a short maturity (and therefore with little interest rate risk).Although it is not explicitly stated in the text, they may be over collateralized to guard against any interest rate risk.
Return: Since the commercial paper is unsecured, it should provide a higher return.However, because commercial paper is issued only by high credit corporations, its return is often only 25-30 basis points higher than T-bills of similar maturity.Note: Yield differential was not stated in text, but instructors may wish to request that students provide examples of current yields.