Assignment : Commercial paper borrowing has continued to decline, with October 2

Question

Assignment:

Commercial paper borrowing has continued to decline, with October 2016 reports listing borrowing at the lowest level in over a decade. Please read more information here: https://www.reuters.com/article/usa-commercialpaper/u-s-commercial-paper-market-shrinks-to-smallest-in-16-years-idUSL2N1CC0SX (Links to an external site.)Links to an external site.   

The article ends with a statement: “‘the Reserve Primary Fund’s share value fell below $1 or “broke the buck” shortly after the collapse of Lehman Brothers during the global financial crisis.”

What do you think will happen with the prime rate? If anticipating a change, how quickly do you think this will affect commercial paper borrowing?

Explanation / Answer

The decline in commercial paper borrowing is an alternative to bank loans. There has been a decline in commercial paper borrowing, indicating that there is a decline in demand of commercial paper. The demand for commercial paper declined during the global financial crisis as investors were not confident whether the banks and other financial institutions will be able to pay back their money. Thus, the prime rate will decline due to the lack of proper demand for commercial paper borrowing. The change in the prime rate will occur only when the economic conditions are stable. The recovery from the economic crisis will help in reinstating the normal financial transactions. This will happen in another 2-3 years. The effects of the crisis will lead to a low prime rate but slowly the rates will come back to normal.

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