There are different types of fundraising tools used by banks and large corporate firms. Two major tools are Commercial Paper and Certificate of Deposit. However, Many people don’t know the Difference between Commercial Paper and Certificate of Deposit.
In this article let’s understand Commercial paper & certificate of Deposit and Difference between Commercial Paper and Certificate of Deposit.
Table of Contents
What is Commercial Paper?
Commercial paper, often known as CP, is a short-term financial instrument used by businesses to raise capital over a one-year period. It is an unsecured capital market tool that is offered as a receivable note and was first launched in India in 1990.
Businesses with high rating agencies frequently employ CPs to expand their short-term borrowing options. This provides investors with a new tool.
Large banks or corporations frequently issue these to cover short-term receivables and satisfy short-term financial commitments, like project financing.
Benefits of Commercial Paper
Following are some major benefits of Commercial Paper:
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Makes a Financial Contribution
It provides additional capital because the cost of the paper to the issuing company is less than the cost of commercial bank loans.
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Adaptable
It has a high liquidity value and a wide maturity range, allowing it to be more flexible.
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Dependable
It is quite dependable and does not have any limitations.
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Spend Less
Companies can save money and get a fair return by using commercial paper.
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Long-Term Funding Source
The maturity range can be tailored to the needs of the company, and matured papers can be paid for by selling new commercial paper.
What is a Certificate of Deposit?
A Certificate of Deposit (CD) is a dematerialized fixed-income financial product regulated by the Reserve Bank of India (RBI). From the start, the payout sum is guaranteed.
Every Financial Institution or Scheduled Commercial Bank based in India can offer a CD. They’re offered out at a reduced price based on their face worth.
A CD, similar to a fixed deposit, is a written statement that you have deposited money in a bank for a specific period of time and that the bank will pay you interest depending on the value and tenure of your deposit.
Benefits of Certificate of Deposit
Following are some major benefits of Certificate of Deposit:
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Safety
Due to market volatility, a certificate of deposit will not take away your capital. It’s a perfectly safe financial instrument that guarantees a fixed amount at maturity, much like regular insurance.
There is no fear of losing the money you placed into your CD because it will continue to grow in a predictable manner. It’s a safe short- to medium-term investment.
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Good Interest Rate
Most investors are drawn to CDs because of these advantages. They pay higher interest rates on lump sum deposits, up to 7.8%, than ordinary savings accounts, which pay roughly 4% on average.
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Flexibility
You have the option of receiving monthly, yearly, or lump sum payments when your CD matures. You can choose the period and amount of your investment, but it must adhere to the bank’s guidelines. You can get the most out of the CD if you tailor it to your needs.
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Maintenance Costs
When it comes to the stock market, there are always transaction fees for deliveries, purchases, and sales. A CD normally does not come with any additional fees. With certain institutions, you only pay what you deposit.
Commercial Paper vs Certificate of Deposit
| Base | Commercial Paper | Certificate of Deposit |
| Definition | Commercial paper is a short-term financial instrument used by businesses to raise capital over a one-year period. | A Certificate of Deposit (CD) is a dematerialized fixed-income financial product issued by Banks and Financial Institutions. |
| Issued by | Corporate Companies | Banks and Financial Institutions |
| Investors | General public, Bank, Corporate companies, NRI, FII | General public, Bank, Corporate companies, Trust, associations, Funds |
| Ratings | Minimum p2 rating of CRISIL Required | No requirement of Rating while issuing CD |
| Time period | Minimum 7 days and maximum 1 year | Minimum 7 days and maximum 1 year |
| Funds | Minimum 5 lakh Rupees Required | Minimum 1 lakh Rupees Required |
| Demat | Promissory note and Dematrialzed Form | Only in Dematrialzed Form |
| Risk | There is minor risk involved on investment | There is no risk on Investment |
Conclusion
These both types of Investment tools come with some pros and cons. Investor should choose based on his own requirement like how much return he/she needs and they are ready to take the risk of not.
This is all from our side regarding Difference between Commercial Paper and Certificate of Deposit(commercial paper vs certificate of deposit). Although, if you have any doubts about certificate of deposit vs commercial paper you can just comment below.
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FAQ About commercial paper vs certificate of deposit
Similarities between commercial paper and Certificate of deposit
Both are financial investment tools, issued to fund raising and for a Minimum time period will be 7 days.
certificate of deposit issued by which bank?
Any bank or Financial institution based in India can issue a certificate of deposit.
Certificate of deposit commercial paper is the instrument of
Certificate of deposit commercial paper is the instrument of fundraising.
Commercial paper certificate of deposit are the instrument of which market
Commercial paper certificate of deposit are the instrument of financial market.
Certificate of deposit meaning
Certificate of deposit is a financial instrument used for fund raising by banks and financial institutions.
