Financial Management and Strategic Management · Financing of Working Capital

Commercial Paper and Short-Term Instruments for CA Inter

Updated 4 October 2026 · Fact-checked

Commercial paper (CP) is an unsecured, short-term promissory note a strong company issues at a discount and redeems at face value. Its cost is the discount earned over the amount received, annualised: (Discount ÷ Net proceeds) × (365 ÷ days). Add issue costs to the discount before computing.

Understand Commercial Paper and Short-Term Instruments

A company often needs cash for a few months, not years. Instead of borrowing from a bank, a creditworthy company can borrow directly from investors by issuing a commercial paper (CP). It is an unsecured promissory note, sold at a discount to face value and repaid at face value on maturity. The gap between the two is the interest.

CP has no collateral behind it. So only companies with a strong credit rating can issue it. In India, CP is issued within RBI's framework, needs a minimum credit rating, and is usually issued for a period from a few weeks up to one year. Check the exact limits in your study material before the exam, as they are revised from time to time.

Other short-term instruments work in a similar way. A certificate of deposit (CD) is issued by banks and eligible financial institutions against money deposited for a fixed short period. A treasury bill (T-bill) is a government security issued at a discount by the Government of India, with maturities of 91, 182 and 364 days. It carries almost no default risk. An inter-corporate deposit (ICD) is an unsecured loan from one company to another, usually for a short period. It is usually for a period of up to six months, with rates depending on the borrower's credit standing.

The simple way to separate them: CP is issued by companies, CD by banks, T-bills by the government, and ICD is a company-to-company loan. For the issuer, CP is a cheap source of working capital. For the investor, CP, CD and T-bills are ways to park surplus cash for a short time.

The cost of CP is more than the discount rate. You must add the cost of rating, stamp duty, issuing and paying agent fees and any underwriting or liquidity back-up. Treat these as extra cost. Then annualise on the cash the company actually receives.

Key rules to remember

Discount on CP: Discount = Face value − Issue price; Issue price is the cash received from investors before issue costs.
Net proceeds: Net proceeds = Issue price − Issue expenses paid upfront; If expenses are paid at maturity or annually, adjust them in the cost, not here.
Effective cost of CP (simple annualised): Cost = [(Face value − Net proceeds) ÷ Net proceeds] × (365 ÷ Days to maturity) × 100; Use 360 days only if the question says so. Total cost includes discount plus all issue costs.
Effective annual rate (compounded): EAR = (1 + Cost for the period)^(365 ÷ Days) − 1; Use when the question asks for the effective or compounded cost. Cost for the period = (Face value − Net proceeds) ÷ Net proceeds.
Issue price from a discount rate: Issue price = Face value ÷ [1 + (Rate × Days ÷ 365)]; Use when the question gives the yield or interest rate on CP, not the price.

How to solve Commercial Paper and Short-Term Instruments questions

Use this method for any CP cost or instrument question. It keeps your working clean and earns step marks.

1Identify the instrument asked: CP, CD, T-bill or ICD. Note who issues it and whether it is at a discount.
2Write down face value, issue price or rate, days to maturity and all costs such as rating fee, stamp duty and agent fee.
3Find the issue price if it is not given, using Face value ÷ (1 + rate × days ÷ 365).
4Compute net proceeds as issue price less costs paid upfront.
5Compute total cost as Face value − Net proceeds. Include costs paid at maturity here.
6Divide the total cost by net proceeds, then multiply by 365 ÷ days.
7If asked for the effective rate, compound the period cost instead of multiplying. State which method you used.
8Write one line of interpretation, such as comparing with the bank loan rate, and state your conclusion.

Quickest way: Fast CP cost under time pressure

When to use it: Use this for MCQs and for the first calculation line in a written answer.

Put the CP cost in a mini table: Face value, Net proceeds, Total cost, Days.
Total cost ÷ Net proceeds gives the period rate. Do this first.
Multiply by 365 ÷ days. For 91 days that is about 4.011, for 182 days about 2.005.
In MCQs, eliminate options lower than the stated discount rate if there are issue costs. The effective cost is always higher than the quoted rate.
For instrument-matching MCQs, remember: CP is by companies, CD by banks, T-bills by government, ICD between companies.
In written answers, show the formula, then numbers, then the result, then a one-line comparison with alternatives.

Common mistakes in Commercial Paper and Short-Term Instruments

Dividing the discount by face value instead of net proceeds.
Face value is the most visible number, and students treat it as the amount borrowed.
Fix: The company borrows only what it receives. Always divide by net proceeds, which is the issue price less upfront costs.
Ignoring issue expenses such as rating fee, stamp duty and agent fees.
Students stop at the discount and treat it as the full cost.
Fix: List every cost separately. Add them to the total cost, and deduct upfront ones from proceeds.
Annualising with the wrong factor, such as 12 ÷ 3 for a 91-day paper without being asked.
Months and days are mixed up.
Fix: Use 365 ÷ days unless the question gives 360 or months. Keep the same basis through the whole question.
Mixing up CP and CD.
Both are short-term money market instruments issued at a discount.
Fix: Link the issuer: CP is a company's unsecured note, CD is a bank's deposit instrument. CP is backed by credit rating, CD by a bank deposit.
Treating T-bills as risky or as long-term securities.
They are confused with government bonds.
Fix: Remember T-bills are zero-coupon, issued at discount, of 91, 182 or 364 days, and have virtually no default risk.
Giving a simple annualised rate when the question asks for effective cost.
Students do not read the wording closely.
Fix: If it says effective annual cost or compounded, use (1 + period rate)^(365 ÷ days) − 1. If it just says cost, state your method.

Worked examples

Example 1

A company issues 91-day commercial paper of face value ₹5,00,00,000 at ₹4,90,00,000. Issuing and paying agent fee, rating and stamp duty total ₹1,00,000, paid upfront. Calculate the effective cost of CP on a simple annualised basis (365 days).

Show the solution

Issue price = ₹4,90,00,000. Upfront costs = ₹1,00,000.
Net proceeds = 4,90,00,000 − 1,00,000 = ₹4,89,00,000.
Total cost = Face value − Net proceeds = 5,00,00,000 − 4,89,00,000 = ₹11,00,000.
Period cost = 11,00,000 ÷ 4,89,00,000 = 0.022495, that is about 2.25%.
Annualise: 0.022495 × (365 ÷ 91) = 0.022495 × 4.01099 = 0.09023.

Answer: The cost of CP is about 9.02% per annum (simple annualised).

Example 2

A company needs ₹2,00,00,000 for 182 days. It can issue CP of face value ₹2,00,00,000 at a yield of 8% per annum. Issue costs of ₹40,000 are paid upfront. Find the issue price, the net proceeds and the simple annualised cost of CP (365 days). Compare with a bank loan at 9.5%.

Show the solution

Issue price = 2,00,00,000 ÷ (1 + 0.08 × 182 ÷ 365).
0.08 × 182 ÷ 365 = 0.039890. So the denominator = 1.039890.
Issue price = 2,00,00,000 ÷ 1.039890 ≈ ₹1,92,32,796.
Net proceeds = 1,92,32,796 − 40,000 = ₹1,91,92,796.
Total cost = 2,00,00,000 − 1,91,92,796 = ₹8,07,204.
Period cost = 8,07,204 ÷ 1,91,92,796 = 0.042056.
Annualise: 0.042056 × (365 ÷ 182) = 0.042056 × 2.00549 = 0.08434.

Answer: Issue price is about ₹1,92,32,796 and net proceeds about ₹1,91,92,796. The cost of CP is about 8.43% per annum, lower than the bank loan at 9.5%, so CP is cheaper if the company has the required rating.

Exam tips

Read whether costs are paid upfront or at maturity. It changes net proceeds.
State the day-count basis (365 or 360) before you calculate. Follow the question if it specifies one.
Expect theory comparisons: write CP versus CD in a short table-like list of issuer, security, risk and tenor, using bullet points.
For MCQs on instruments, match instrument to issuer. There is no negative marking, so always attempt.
End a calculation answer with a one-line comparison against bank finance, because it shows application.

Practice questions from Financing of Working Capital

Commercial Paper and Short-Term Instruments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Commercial Paper and Short-Term Instruments: frequently asked questions

What are the main features of commercial paper?

CP is an unsecured, short-term promissory note issued at a discount and redeemed at face value. It is issued by companies with a good credit rating, directly to investors. It is usually cheaper than bank credit for strong issuers.

How do you calculate the effective cost of commercial paper?

Find net proceeds by deducting upfront issue costs from the issue price. Divide total cost (face value minus net proceeds) by net proceeds, then multiply by 365 divided by the days to maturity. For compounded cost, raise one plus the period rate to the power of 365 divided by days, then subtract one.

What is the difference between commercial paper and a certificate of deposit?

CP is issued by companies and is unsecured, relying on the issuer's credit rating. A CD is issued by banks and eligible financial institutions against funds deposited with them. Both are issued at a discount and are short-term.

How are treasury bills and inter-corporate deposits used in working capital management?

T-bills, issued by the government at a discount for 91, 182 or 364 days, are a safe place to park surplus cash. ICDs are short-term unsecured loans between companies, used by cash-surplus firms to lend and by cash-short firms to borrow, usually at higher rates than bank deposits.