Economics • Banking & FinanceHard
In the context of the Indian money market, what distinguishes 'Commercial Paper (CP)' from 'Certificate of Deposit (CD)'?
A. Commercial paper is an unsecured promissory note issued by highly rated corporates, whereas certificates of deposit are negotiable money market instruments issued by banks✓ Correct Answer
B. Commercial paper is issued exclusively by regional rural banks, while certificates of deposit are issued by microfinance institutions
C. Commercial paper requires physical collateral backing, whereas certificates of deposit are uncollateralized short-term debt securities
D. Commercial paper has a maximum maturity of one year, whereas certificates of deposit can be issued for a minimum period of ten years
💡 Solution & Explanation
Commercial paper is an unsecured short-term promissory note issued by corporations and All-India Financial Institutions to meet short-term liabilities, whereas certificates of deposit are negotiable deposit receipts issued by scheduled commercial banks. Distractors misstate issuer categories and collateral requirements across these money market instruments. Both instruments are traded actively in the secondary market to provide short-term liquidity management options. Minimum denomination requirements apply to both to restrict retail investor participation.
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