Final answer:
Commercial paper issuers need a credit rating to demonstrate their creditworthiness and make their paper attractive to investors, as a good rating suggests lower risk. Market interest rates and the perceived risk of default influence the price and attractiveness of these financial instruments.
Step-by-step explanation:
Commercial paper issuers usually require a credit rating for their issue because it serves as an indicator of the company's creditworthiness, which is paramount for short-term unsecured debt instruments such as commercial paper. A strong credit rating can lower the cost of borrowing and makes the commercial paper more attractive to investors, as it suggests a lower risk of default.
In the example, you can buy commercial paper of a major U.S. corporation for $5,950,000 with a face value of $6,000,000 that is 60 days from maturity. This discount is akin to the interest earned on the paper. The need for a credit rating is emphasized by the risks involved with bonds or similar debt instruments. If a bond carries no risk and pays consistent interest, its price can stay close to its face value. However, in scenarios where market interest rates increase, making the bond's fixed interest payments less attractive, the price of the bond must decrease to make it a worthwhile investment.
The example of Ford Motor Company issuing a bond or opening a Certificate of Deposit (CD) also highlights the importance of understanding interest rates, risk, and the role of credit ratings in the financial markets.