Canadian Securities Course (CSC) Level 2 Practice Exam

What category does Asset-Backed Commercial Paper (ABCP) fall under?

1. Securities that combine a bond and a derivative for passive investments.

2. Commercial paper with a maturity of less than one year backed by specific assets.

3. Investing in private companies through private equity for increased returns and risks.

4. Structure that divides attributes of shares, often with a leveraged position.

The correct answer is: Commercial paper with a maturity of less than one year backed by specific assets.

Asset-Backed Commercial Paper (ABCP) fits squarely into the definition provided in the choice about commercial paper. Specifically, ABCP is a type of short-term debt instrument that is issued by a conduit (a special purpose vehicle) and is backed by pools of assets. These assets may include various types of financial obligations such as loans, mortgages, or receivables. The key characteristic of ABCP is its short maturity, typically being less than one year, which aligns with the definition of commercial paper. Moreover, ABCP helps issuers to obtain financing at a potentially lower cost than other forms of debt due to the backing of the specific assets. This structure offers a way for investors to gain exposure to those underlying assets, while allowing issuers to raise funds efficiently. The other options do not accurately describe ABCP. Combining bonds and derivatives pertains more to hybrid securities, private equity involves equity investments in private companies with higher risks, and the last option relates to structured equity products, which do not align with the nature of ABCP.