Quick Answer
Commercial paper is unsecured, short-term (1 to 270 days), and sold at a discount by investment-grade issuers. Brokered CDs are FDIC-insured to $250,000 and trade in the secondary market. Eurodollar bonds are dollar-denominated but issued outside the U.S. and unregistered. Variable-rate preferreds carry less interest rate risk than fixed-rate preferreds.
Beyond traditional corporate bonds, you need to know several other debt instruments that appear on the Series 7 exam. These range from ultra-short-term money market instruments to specialized securities with unique characteristics.
What Is Corporate Commercial Paper?
Commercial paper is a short-term unsecured promissory note issued by corporations for working capital needs.
| Feature | Detail |
|---|---|
| Issuer | Corporations with high credit ratings (investment grade) |
| Maturity | 1-270 days (most commonly 30-90 days) |
| Pricing | Sold at a discount to face value |
| Collateral | None (unsecured) |
| Registration | Exempt from SEC registration if maturity is 270 days or less |
| Use of proceeds | Short-term working capital (payroll, inventory financing) |
- The 270-day maximum maturity allows the issuer to use the short-term commercial-paper exemption from SEC registration
- The discount from face value represents the investor's interest
- In practice, most commercial paper matures within 30-90 days, frequently in the 30-45 day range
Think of it this way: A company needs cash for next month's payroll. Instead of taking out a bank loan, it sells IOUs at a slight discount. Investors buy the IOUs and collect face value when they mature; the discount is their return.
Exam Tip: Gotchas
- Commercial paper maximum maturity is 270 days (not 90 days or 1 year). The 270-day limit is what keeps it exempt from SEC registration.
- Commercial paper is unsecured. Only investment-grade companies can issue it because there is no collateral backing it.
What Are Brokered Certificates of Deposit (CDs)?
Brokered CDs are bank-issued CDs sold through broker-dealers, giving them unique characteristics:
- FDIC insured up to $250,000 per depositor, per bank
- Can be traded in the secondary market (unlike traditional bank CDs)
- May be callable by the issuing bank
- Subject to interest rate risk if sold before maturity (price fluctuates with rates)
Exam Tip: Gotchas
- FDIC insurance only protects against the bank's default. If you sell a brokered CD before maturity in the secondary market, you can still lose money due to interest rate changes.
- Brokered CDs are not the same as traditional bank CDs. They trade in secondary markets and their prices fluctuate with interest rates.
What Are Eurodollar Bonds?
Eurodollar bonds are U.S. dollar-denominated bonds issued outside the United States.
| Feature | Eurodollar Bond | Domestic Corporate Bond |
|---|---|---|
| Denomination | U.S. dollars | U.S. dollars |
| Issued where | Outside the U.S. | Inside the U.S. |
| SEC registration | Not registered | Registered |
| Form | Typically bearer | Book-entry |
| Interest payments | Annually | Semiannually |
| Regulation | Less regulated | Subject to U.S. regulation |
Exam Tip: Gotchas
- "Eurodollar" has nothing to do with the euro currency. "Euro" here means "outside the country of the currency." A Eurodollar bond is denominated in U.S. dollars but issued outside the U.S.
- Eurodollar bonds pay interest annually, not semiannually like domestic corporate bonds.
What Are Variable-Rate Preferreds?
While technically preferred stock, variable-rate preferreds are grouped with debt-like instruments because of their fixed-income characteristics:
- Dividend rate adjusts periodically based on a benchmark rate
- Less interest rate risk than fixed-rate preferreds because the dividend adjusts with market rates
- Behave more like floating-rate debt than traditional equity
Exam Tip: Gotchas
- Variable-rate preferreds have less interest rate risk than fixed-rate preferreds. Because the dividend adjusts with market rates, their price stays more stable when rates change.
What Should You Check on Exam Day?
- Lock in the commercial-paper maturity ceiling: 270 days, tied to the SEC registration exemption.
- Remember FDIC coverage on a brokered CD protects against bank default only, not interest-rate-driven price changes if sold early.
- Distinguish Eurodollar bonds (annual interest, unregistered, issued outside the U.S.) from domestic corporate bonds (semiannual, registered).
- Classify variable-rate preferreds by their debt-like risk profile even though they are legally preferred stock.