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Financial Management and Business Data Analytics · Money Market

Commercial Paper, Certificates of Deposit and Commercial Bills

Updated 10 October 2026 · Fact-checked

Commercial paper (CP) is an unsecured short-term promissory note issued by creditworthy companies. A certificate of deposit (CD) is a negotiable deposit receipt issued by banks. Both are sold at a discount and repaid at face value. To solve questions, find the discount, then the issue price, then the yield for the period, then annualise it on a 365-day year.

Understand Commercial Paper, Certificates of Deposit and Commercial Bills

The money market deals in funds for up to one year. Commercial paper, certificates of deposit and commercial bills are three of its main instruments. All three are usually priced at a discount: you pay less today and receive the face value on maturity. The gap is your return.

Commercial paper (CP) is an unsecured promissory note issued by a strong company, an NBFC or an eligible financial institution to raise short-term funds. It needs no collateral, so only issuers with a good credit rating can sell it. Under RBI directions, CP is issued in dematerialised form with a minimum credit rating, a minimum maturity of 7 days and a maximum of one year from the date of issue. The minimum amount per investor is ₹5 lakh and multiples of it. Check the latest RBI directions for the exact eligibility conditions, as these change.

Certificate of deposit (CD) is a negotiable, usually dematerialised, term-deposit instrument issued by banks (and by eligible all-India financial institutions for longer terms). Under RBI directions, bank CDs run from 7 days to one year, and the minimum is ₹1 lakh and multiples. Financial institutions issue CDs for one to three years. A CD is a deposit liability of a bank, so it is safer than CP for the investor. That is why CDs usually carry slightly lower yields than CP of similar maturity.

Commercial bill is a bill of exchange arising from a genuine trade sale. The seller (drawer) orders the buyer (drawee) to pay a fixed sum on a fixed date. A demand bill is payable on sight. A usance bill is payable after a stated period. The seller can get cash early by getting the bill discounted with a bank at a discount rate. The bank can rediscount it with another institution. The bill is backed by two parties, the drawer and the drawee, and by a real trade transaction.

The main difference: CP is a corporate borrowing instrument with no security. A CD is a bank's deposit instrument. A bill is tied to one trade transaction and is a bank-financing tool.

Key rules to remember

Discount on the instrument
Discount = Face value × d × (days ÷ 365)
d is the annual discount rate. Indian money market questions use a 365-day year unless the question says otherwise.
Issue price / proceeds
Price = Face value − Discount
For bill discounting, this is the amount the bank pays you now.
Yield for the period
Period return = (Face value − Price) ÷ Price
Divide by the price you pay, not the face value.
Annualised (simple) yield
Yield = [(F − P) ÷ P] × (365 ÷ days)
Also written as d ÷ (1 − d × days ÷ 365) when you only have the discount rate.
Effective annual yield
EAY = (1 + (F − P) ÷ P)^(365 ÷ days) − 1
Compounds the period return. It is higher than the simple yield for periods under a year.
Key RBI limits (CP and CD)
CP: 7 days to 1 year, ₹5 lakh minimum. Bank CD: 7 days to 1 year, ₹1 lakh minimum.
Confirm against the latest RBI directions before the exam.

How to solve Commercial Paper, Certificates of Deposit and Commercial Bills questions

Use this order for any numerical or theory question on CP, CDs or bills.

  1. 1Identify the instrument and its parties: issuer or drawer, investor or bank, and the face value.
  2. 2Note the number of days to maturity and whether the rate given is a discount rate or a yield.
  3. 3Calculate the discount: face value × rate × days ÷ 365.
  4. 4Calculate the price or proceeds: face value minus discount.
  5. 5Calculate the period return as (face value − price) ÷ price.
  6. 6Annualise it: multiply by 365 ÷ days for the simple yield. Compound with the power 365 ÷ days if the question asks for effective yield.
  7. 7If costs apply (issuing and paying agent fees, stamp duty, rating fees), add them to the issuer's cost before computing the effective cost.
  8. 8For theory parts, state issuer, eligibility, maturity, minimum amount and risk in short points.
  9. 9

Quickest way: Discount rate to yield shortcut

When to use it: Use when the question gives only the annual discount rate and the days to maturity, and asks for the yield.

  1. Compute t = days ÷ 365.
  2. Compute d × t (discount as a fraction of face value).
  3. Simple yield = d ÷ (1 − d × t). You skip finding the price.
  4. For effective yield, period return = d × t ÷ (1 − d × t), then raise (1 + period return) to 365 ÷ days.
  5. Check the answer: the yield must be higher than the discount rate.

Common mistakes in Commercial Paper, Certificates of Deposit and Commercial Bills

  • Dividing the discount by face value to get the yield.

    The discount rate is quoted on face value, so students reuse it.

    Fix: Yield is always return on the amount invested. Divide (F − P) by P, the price paid.

  • Using 360 days or months instead of 365 days.

    Habit from other interest problems.

    Fix: Use days ÷ 365 for money market instruments unless the question gives another basis.

  • Treating the simple annualised yield as the effective yield.

    Both are annual percentages, so they look the same.

    Fix: Read the wording. 'Effective' means compound the period return over 365 ÷ days.

  • Mixing up who issues CP and CDs.

    Both are discounted short-term instruments.

    Fix: CP is issued by companies, NBFCs and eligible financial institutions. CDs are issued by banks and eligible financial institutions.

  • Quoting a wrong maturity or minimum amount.

    Students mix CP, CD and T-bill limits.

    Fix: Learn CP and CD together: 7 days to 1 year, with ₹5 lakh for CP and ₹1 lakh for CDs. FI CDs run 1 to 3 years.

  • Ignoring issue costs when asked for the cost of CP to the issuer.

    The question seems to be only about the discount.

    Fix: Add rating, agent and stamp costs to the discount, then compute the cost on the net proceeds.

Worked examples

Example 1

A company issues 90-day commercial paper of face value ₹1,00,00,000 at a discount rate of 8% p.a. Find the issue price, the simple annualised yield and the effective annual yield. Use a 365-day year.

Show the solution
  1. Discount = 1,00,00,000 × 0.08 × 90 ÷ 365 = ₹1,97,260 (approx.).
  2. Issue price = 1,00,00,000 − 1,97,260 = ₹98,02,740 (approx.).
  3. Period return = 1,97,260 ÷ 98,02,740 = 2.0123%.
  4. Simple annualised yield = 2.0123% × 365 ÷ 90 = 8.16%.
  5. Effective annual yield = (1.020123)^(365 ÷ 90) − 1 = 1.0842 − 1 = 8.42% (approx.).

Answer: Issue price ≈ ₹98,02,740. Simple yield ≈ 8.16% p.a. Effective annual yield ≈ 8.42%.

Example 2

A bank issues a 180-day certificate of deposit with face value ₹50,00,000 at an issue price of ₹48,00,000. Find the simple annualised yield and the effective annual yield to the investor. Use a 365-day year.

Show the solution
  1. Discount = 50,00,000 − 48,00,000 = ₹2,00,000.
  2. Period return = 2,00,000 ÷ 48,00,000 = 4.1667%.
  3. Simple annualised yield = 4.1667% × 365 ÷ 180 = 8.45%.
  4. Effective annual yield = (1.041667)^(365 ÷ 180) − 1.
  5. Here 365 ÷ 180 = 2.0278, and (1.041667)^2.0278 = 1.0863, so EAY = 8.63%.

Answer: Simple annualised yield ≈ 8.45% p.a. Effective annual yield ≈ 8.63%.

Exam tips

  • Expect a short numerical on discount, price and yield, plus an MCQ on issuers, maturity or minimum amount. Learn both.
  • In MCQs, the trap option is usually the yield calculated on face value. Compute on price.
  • Show each line in written answers: discount, price, period return, annualised yield. Each earns a step mark.
  • For compare-and-choose questions, state the investor's view: a CD is safer, CP usually pays more, and a bill is backed by a trade transaction.
  • Write the 365-day assumption in your answer if the question does not state it.

Practice questions from Money Market

Commercial Paper, Certificates of Deposit and Commercial Bills: frequently asked questions

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

CP is an unsecured note issued by companies, NBFCs and eligible financial institutions. A CD is a negotiable deposit instrument issued by banks and eligible financial institutions. A CD is a bank liability, so it is generally safer and yields a little less. Both are issued at a discount.

What are the RBI maturity and denomination limits for CP?

CP maturity runs from a minimum of 7 days to a maximum of one year from the date of issue. The minimum amount is ₹5 lakh and multiples of it. Check the latest RBI directions for eligibility and rating conditions, as they are revised from time to time.

How do I calculate the effective yield on commercial paper?

Find the price, then the period return (F − P) ÷ P. Raise (1 + period return) to the power 365 ÷ days and subtract 1. The result is the effective annual yield.

What is a commercial bill and how is it discounted?

It is a bill of exchange arising from a trade sale. The seller gets it discounted by a bank. The bank pays the face value less the discount, which is face value × discount rate × days left ÷ 365, and collects the full amount from the buyer on the due date.