Do you know for which purposes commercial paper and certificate of deposit are used? These are the crucial instruments in the money market for distinct financial objectives. Furthermore, these are the major fundraising tools utilized by large corporate organizations and banks.
People often misinterpret these two terms due to their lack of knowledge. So, which needs to be chosen out of these two superior money market instruments? Such distinction depends on the leading purpose for which the funds are needed!
With a significant distinction between instruments issued by the government for treasury objectives and private firms, these two tools are immensely popular among the traders who are willing to protect their funds in safe investments.
In today’s article, we will discuss the major difference between Commercial Paper and Certificate of Deposit. Let’s get started!
Commercial Paper Overview
A short-term financial statement is regarded as Commercial Paper or CP. It is mainly utilized by various businesses to enhance capital within one year. Being a non-secured capital market fundraising tool, it offered a receivable note after its inception in India in 1990.
Often, businesses with top-rated corporates constantly employ Commercial Papers to propagate their short-term lending options. It offers the investors a top-notch tool. On the contrary, the corporations and renowned banks issue CPs to satiate short-term financial commitments in project financing and cover short-term receivables.
Advantages of Commercial Paper?
Dependable solution: CPs don’t have any constraints, and it is pretty dependable.
Makes a top-notch financial contribution: It offers extra capital as the paper budget to the issuing organization is significantly less than any commercial bank loan budget.
Long-term source of funding: The entire maturity range can be customized to the requirements of the company. Moreover, the maturity papers could be reimbursed by selling a brand new CP.
Adaptable: CP possesses a broad maturity range and a high liquidity value, which makes it highly flexible.
Disadvantages of Commercial Paper
- After issuing CP or commercial paper, the number of credits may get minimized.
- It is mainly available to a few profitable organizations and blue-chip firms.
Certificate of Deposit Overview
Certificate of Deposit or CD is a crucial document primarily issued by the eminent banks to a veteran investor who selects to deposit his amounts or funds in the bank for a definite amount of time. Moreover, a CD is also regarded as a promissory note issued by a bank.
One of the greatest features of the Certificate of Deposit is that cash has been deposited for a specific when the depositor couldn’t withdraw the precise funds without collecting a penalty for quick withdrawal. The interest amount reimbursed to a CD depositor is massive than for a savings account.
In brief, a CD is a dematerialized fixed-income major financial product modulated by the RBI or Reserve Bank of India. From scratch, the payout total will be guaranteed. It is pretty analogous to a fixed deposit and it is a written statement of money deposition in any bank for a definite time. That’s why that bank will give your certain interest relying on the tenure and value of your deposit.
Advantages of Certificate of Deposit?
Flexibility: Once your CD matures, you will get the option of getting monthly or yearly, or one-time lump sum payments. Due to its supreme flexibility, you can opt for the tenure and investment amount.
Full-fledged safety: A CD will never confiscate your capital because of the market volatility condition. It’s a completely safer financial instrument, which guarantees a fixed maturity, more like regular insurance.
Costs of Maintenance: There will always be significant transaction fees for stock buying, deliveries, and sales when it comes to the share market. You don’t need any additional fees for a CD as all you have to pay is the deposit with specific institutions.
Disadvantages of CD
Early withdrawal penalties: Credit unions and banks often impose a specific amount from you if you take out funds from a CD before its maturity date.
Lower Returns: CD may provide stable security and returns, but the consequence will be lower returns. You may see the fastest growth of your money by investing in mutual funds or stocks.
Difference between Commercial Paper and Certificate of Deposit
| Criteria of differentiation | Commercial Paper | Certificate of Deposit |
| Meaning | It is a short-term, negotiable, unsecured, promissory note, and interchangeable by acceptance and delivery with a major fixed maturity period. | CD is also short-term, unsecured, negotiable instruments in short-term tradable time deposits. |
| De-Mat | The commercial paper could be issued as a dematerialized form and a promissory note. Subscribers and issuers are inspired to opt for self-reliance in this De-Mat form. So, FI, banks, and other primary dealers can invest solely in De-Mat. | FI or banking sectors must issue the certificate of deposit in the dematerialized form. |
| Investors | The scheduled commercial banks, individuals, NRI, corporate, and FII. | Corporations, funds, individuals, associates, companies, trust, and others. |
| Maturity | 7 days of minimum maturity and maximum range is up to 1 year from the date of issue. | Minimum 7 days and maximum range shouldn’t exceed 1 year. In the case of FIs, the minimum maturity rate is 1 year and the maximum is not more than 3 years. |
| Issuer | Superior credit-worthy corporates, all Indian financial institutions, and primary dealers. | Financial institutions and banks. |
| Rating | The minimum credit rating will be P2 of CRISIL. | It doesn’t need to abide by such requirements. |
| Denomination | The range should be a minimum of 5 lakhs and could go higher. | The minimum range should be 1 lakh and multiples thereafter. |
Conclusion
As both of such investment or fundraising tools possess some pros and cons, we have enlisted these two factors for your convenience. Investors like you should choose according to their requirements, such as the number of risks they need to take and how much return they actually need. Hopefully, this article showcases the crucial distinction between Commercial Paper and Certificate of Deposit, helps you in understanding the factors. If you have any questions, kindly let us know by commenting below!