Cp's and cd's

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16 October 2012 What is the difference between Certificate of Deposits and Commercial Papers?

CA Manish

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17 October 2012
• Certificates of deposit and commercial papers are both instruments used in the money market for different financial purposes.

• A certificate of deposit (CD) is a document issued by the bank to an investor who chooses to deposit his funds in the bank for a specific amount of time. Once the money has been deposited the depositor cannot withdraw the funds before maturity without incurring a penalty for early withdrawal.

• Commercial paper is used a substitute for a bank loan and is a short term money market instrument which matures within a period of 270 days.

• The main difference between the two forms of instruments is the time period of maturity of the two. While a CD is usually for a longer term, a promissory note is for a shorter period.

CDs are issued as a proof of an investment of funds in the bank by a depositor while commercial papers are issued to an investor as a proof of purchase of the issuer’s debt (purchasing debt means providing funds like a bank gives out a loan).