3. Explain how problems in the U.S. subprime mortgage market caused difficulties in the Canadian commercial paper market. Commercial paper Is sold to investors on the promise that the Issuing organization will pay back the principal

(plus Interest) in the near future (usually 30 or 60 days). In effect, the Issuer might say something like this: If you loan my company $99, In one month my company will give you

$100. So, the investor earns $1 of interest in one month on a $99 loan. Both individuals and organizations buy commercial paper because they want to put their extra cash Into a liquid (and safe) short-term investment that will earn Interest until they need the money.

In recent years, a variation of this basic system was developed. Asset-backed commercial paper (ABCP) is issued by companies (called conduits) that sold subprime mortgages to people with poor credit ratings. They then packaged these mortgages together with other, more traditional loans (on credit cards, automobiles, and regular home mortgages) and sold them as collateralized debt obligations (COOs) to investors.