Certificates of Deposit
A certificate of deposit (CD) is a time deposit with a bank. Time deposits may not be withdrawn on demand. The bank pays interest and principal to the depositor only at the end of the fixed term of the CD.
CDs issued in denominations larger than $100,000 are usually negotiable, however; that is, they can be sold to another investor if the owner needs to cash in the certificate before its maturity date. Short-term CDs are highly marketable, although the market significantly thins out for maturities of three months or more.
CDs are treated as bank deposits by the Federal Deposit Insurance Corporation, so they are insured for up to $100,000 in the event of a bank insolvency.
Commercial Paper
The typical corporation is a net borrower of both long-term funds (for capital investments) and short-term funds (for working capital). Large, well-known companies often issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks.
These notes are called commercial paper (CP). Sometimes, CP is backed by a bank line of credit, which gives the borrower access to cash that can be used if needed to pay off the paper at maturity.
CP maturities range up to 270 days; longer maturities require registration with the Securities and Exchange Commission and so are almost never issued. CP most commonly is issued with maturities of less than one or two months in denominations of multiples of $100,000.
Therefore, small investors can invest in commercial paper only indirectly, through money market mutual funds.
CP is considered to be a fairly safe asset, given that a firm’s condition presumably can be monitored and predicted over a term as short as one month. It is worth noting, though, that many firms issue commercial paper intending to roll it over at maturity, that is, issue new paper to obtain the funds necessary to retire the old paper.
If lenders become complacent about monitoring a firm’s prospects and grant rollovers willy-nilly, they can suffer big losses. When Penn Central defaulted in 1970, it had $82 million of commercial paper outstanding —the only major default on commercial paper in the past 40 years.
CP trades in secondary markets and so is quite liquid. Most issues are rated by at least one agency such as Standard & Poor’s. The yield on CP depends on the time to maturity and the credit rating.
This is really helpful information! Don't forget that you can also use a free cd interest calculator to see how much your cd may be worth over time
ReplyDelete