Your company, large and currently with a good credit rating, needs $10 million for the next 5 years to finance a new long-term capital project. As a CFO, you are considering two financing alternatives: (a) issuing commercial paper (CP) with a maturity of 9 months (maximum) and rolling it over for the next 5 years; and (b) 5-year term loan at a fixed interest rate through an insurance company.
Discuss the pros and cons of issuing CP relative to borrowing the term loan to finance the new project. Assume that the corporate bond yield curve is currently a normal, upward slopping yield curve.
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