Comparing Certificate of Deposit and Commercial Paper

Comparing Certificate of Deposit and Commercial Paper

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Certificate of deposits (CDs) are a popular investment option among individuals who want to earn a fixed rate of return on their investment without taking on too much risk. Certificate of deposit can be issued by schedules commercial banks (SCBs) and other financial institutions, and they typically offer higher interest rates than savings accounts. The RBI allows SCBs (excluding regional rural banks and local area banks) to issue CDs to raise funds. The minimum amount of a CD that can be issued is Rs. 1 lakh, and the maturity period of CDs through SCBs can be between 3 months to a year while the term period of CDs through financial institutions can be between 1 to 3 years. CDs can be issued in the form of a promissory note or a dematerialized form.

One of the benefits of certificate of deposit is that they offer a fixed rate of return, which means that the investor knows exactly how much they will earn on their investment. CDs are also a low-risk investment because they are backed by the bank's creditworthiness and are insured up to Rs. 5 lakhs per depositor. Another benefit of CDs is that they are a good option for individuals who want to invest their money for a specific period of time. CDs are ideal for short-term investments because they offer a higher interest rate than savings accounts, and the funds can be withdrawn after the maturity period without any penalty.

In contrast to commercial paper (CP), CDs are a secured debt instrument backed by the creditworthiness of the issuing bank. While mentioning certificate of deposit and commercial paper difference, it must also be highlighted that CPs offer higher interest rates than CDs but they are also, comparatively riskier.

Hence, certificates of deposit by RBI are a popular investment option among individuals who want to earn a fixed rate of return on their investment without taking on too much risk. They can be issued by banks and other financial institutions, are insured and backed by the bank's creditworthiness. CDs are a good option for individuals who want to invest their money for a specific period of time, and they offer a higher interest rate than savings accounts. Thus, investors can certainly pick among a range of choices to select the best available option.