Let’s take a look into one of the most popular forms of debt instruments introduced by the Indian government post the liberalization of the economy.
A commercial paper is an instrument of the money market containing a short term maturity. Commercial papers come with the flexibility of different maturities that ranges to about 270 days. Commercial papers are mainly issued by entities with a high credit rating like big firms and corporations to meet their short-term liabilities. Issuers can raise a considerable sum of money from investors through commercial papers. These instruments are issued at a discount from the face value which depends on the prevailing interest rate and the reputation of the issuing entity.
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Commercial papers set its foot in India in the year 1989. The RBI introduces commercial papers on 27th march on the same year in the Indian money market. It was recommended for registration based on the below-given points:
See Also: Features Of Indian Money Market
Some important features of commercial papers are given below:
See Also: Functions Of Money Market
Commercial papers can be classified into four separate categories, which are as follows:
Draft: it is a third party paper confirming the payment to the bearer. It is popularly used to safeguard payments that take place in overseas transactions. The draft is issued by an entity to the other promising to pay an amount through a third party.
Cheque: a cheque is a type of commercial paper where the drawee is a bank. A cheque is payable on demand to the specified bearer.
Promissory Note: one of the most popular forms of commercial papers which is a promise to pay money. As per the promissory note, the issuer promises to pay an amount to the entity that is in possession of the note.
Certificate of Deposit: the certificate of deposit is a confirmation by the bank of the acquisition of a specific sum of money from the depositor for a fixed time period. The bank repays the amount to the depositor after the fixed period along with interest payment.
See Also: All You Need To Know About Money Market
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