COMMERCIAL PAPERS AND CERTIFICATE OF DEPOSIT

KAPIL BINDAL MBA 3A (035)

COMMERCIAL PAPERS
Commercial Paper (CP) is an unsecured money market instrument issued in

the form of a promissory note. It was introduced in India in 1990. It was introduced with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP. A corporate would be eligible to issue CP provided a. the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore b. company has been sanctioned working capital limit by banks or all-India financial institutions. c. the borrowal account of the company is classified as a Standard Asset by the financing banks / institutions.

COMMERCIAL PAPERS(Contd..)
Since it is not backed by collateral, only firms with excellent credit

ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price.

The minimum credit rating shall be A-2 [As per rating symbol and

definition prescribed by Securities and Exchange Board of India (SEBI)].

The issuers shall ensure at the time of issuance of CP that the rating so

obtained is current and has not fallen due for review.

CP can be issued for maturities between a minimum of 7 days and a

maximum of up to one year from the date of issue. However, the maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid.

CERTIFICATE OF DEPOSIT
A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restricts holders from withdrawing funds on

demand. Although it is still possible to withdraw the money, this action will often incur a penalty. For example, let's say that you purchase a $10,000 CD with an interest rate of 5% compounded annually and a term of one year. At year's end, the CD will have grown to $10,500 ($10,000 * 1.05). CDs are similar to savings accounts in that they are insured and thus virtually risk free; they are "money in the bank". CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and by the National Credit Union Administration (NCUA) for credit unions.

CERTIFICATE OF DEPOSIT (Contd..)

They are different from savings accounts in that the CD has a specific,

fixed term (often monthly, three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest.
CDs typically require a minimum deposit, and may offer higher rates

for larger deposits. The best rates are generally offered on "Jumbo CDs" with minimum deposits of $100,000.