What is the Difference Between Certificate of Deposit (CD) and Commercial Paper?

The main differences between Certificate of Deposit (CD) and Commercial Paper (CP) are:

1. Issuer: CDs are issued by financial institutions and banks, while commercial papers are issued by primary dealers, large corporations, and All-India Financial Institutions.
2. Minimum Investment: A CD requires a minimum investment of ₹1 lakh, while commercial papers are issued for investments of at least ₹5 lakhs. Both are available in multiples of ₹1 lakh and ₹5 lakhs, respectively.
3. Risk: Commercial papers are unsecured and carry a higher degree of risk, while certificates of deposit are typically more secure and stable investments.
4. Returns: Commercial papers generally offer higher returns compared to certificates of deposit.
5. Taxation: In India, a certificate of deposit is fully taxable under the Income Tax Act, while commercial papers have different tax implications.
6. Trading: CDs are not publicly traded, and banks are not permitted to buy back a CD before its maturity. Commercial papers trade in the money market and are liquid investments.

When deciding between commercial paper and certificates of deposit, an investor should consider their personal financial goals and risk tolerance. If they are comfortable with a higher level of risk and are looking for potentially higher returns, then commercial paper may be the better choice. However, if the investor is looking for a more stable and secure investment option, a certificate of deposit may be more suitable.

Comparative Table: Certificate of Deposit (CD) vs Commercial Paper

Here is a table comparing the differences between Certificates of Deposit (CD) and Commercial Paper:

The primary difference between CDs and commercial paper is the issuer. CDs are issued by banks and financial institutions, while commercial paper is typically issued by corporations and financial institutions. CDs are generally longer-term investments, while commercial paper has a shorter maturity period, typically ranging from 90 to 270 days. CDs are insured by the FDIC, making them a safer investment, while commercial paper is unsecured and carries a higher risk. Commercial paper typically offers higher interest rates compared to CDs. The choice between the two investment options depends on an investor's financial goals and risk tolerance.