C-Bills & Commercial Papers

C-Bills & Commercial Papers

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To To define commercial papers, they are a short-term, unsecured promissory note issued by corporations, financial institutions, and other entities. They typically mature within a period of 1 to 364 days and sold to investors in the form of a discount from their face value. The discount rate is determined by market forces, based on factors such as the creditworthiness of the issuer, prevailing interest rates, and demand for the instrument. CP is generally used to finance working capital, fund capital expenditures, or to bridge gaps in cash flow.

The Reserve Bank of India (RBI) also allows banks and financial institutions to issue CPs under its regulatory framework. Commercial paper by RBI was introduced in 1990 to provide an alternative source of short-term funding for companies other than bank loans. The RBI sets guidelines for the issuance of CPs, including the eligibility criteria for issuers, the minimum and maximum maturity period, and the minimum credit rating required for issuers. The RBI also monitors the issuance of CPs to ensure compliance with the regulations.

A commercial bill on the other hand, is a short-term, negotiable instrument that represents a promise to pay a specific amount of money to the holder of the bill at a predetermined date. CBs are issued by companies to finance trade transactions, such as the purchase of goods or services, and are typically backed by the underlying trade transaction. CBs can be either discounted or held until maturity, depending on the needs of the holder.

Thus, commercial paper (CP) and commercial bill (CB) help to secure short-term debt and are widely used in the financial industry. These instruments play an important role in providing liquidity to the market and facilitating the financing needs of businesses. The difference between CP and CB is that while CP is an unsecured instrument, CB is typically backed by the underlying trade transaction, making it a secured instrument. CBs are generally used for short-term financing needs, while CP’s are used for a wider range of financing needs.