What are the differences between Commercial Paper and Certificate of Deposit ?


What are the differences between Commercial Paper and Certificate of Deposit ?

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Donna 2 years 1 Answer 754 views Silver 0

Answer ( 1 )

  1. Commercial Papers are Certificate of Deposit both are players of money market. These instruments issued in accordance with guidelines issued by Reserve Bank of India. Both rests in same segment but carry different features. The features of these instruments makes them alike. Before we go for differentiation, lets first know what actually they are.

    Commercial Papers – This instrument is for a short-term investment which ranges over a period of 365 days. It was introduced in India in 1990.This instrument is used as substitute of Bank Loan. It is not supported by any collateral. So investors prefer only creditworthy institutions. These papers are generally issued in a large denomination, so small investor can invest in these through by Mutual Funds. As institutions can get funds in a short span of time, it also saves from complex compliance of Securities and Exchange Board of India.

    Certificate of Deposit– A certificate of deposit is an instrument issued by the bank to an investor who deposits his funds in the bank for a specific amount of time. Generally, it is issued in form of Promissory Note. The investment cannot be withdrawn unless deduction of penalty. Interest quoted is the return on the investment. These instruments may or may not be transferable.

    After getting short intro, let’s throw light on their feature which makes difference between them –

    Corporates, primary dealers and the All-India Financial Institutions are eligible to issue Commercial Papers while Certificate of Deposit can be issued by Scheduled Commercial Banks (excluding Regional Rural Banks and Local Area Banks); and select All-India Financial Institution permitted by RBI only.

    Commercial Papers can be issued in denomination of Rs. 5 lakhs or multiple thereof while Certificate of Deposit can be issued in the denomination of Rs 1 lakh or multiple thereof.

    Commercial Papers have maturity period ranging from 7 days to 365 days. Certificate of deposit also have the same maturity period but Certificate of Deposit issued by Financial Institution has a maturity period ranging from 1 year to 3 years.

    Commercial Papers are always issued on discount and redeemed at face value. This difference constitutes return while Certificate of deposit carries an interest rate.

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