What are commercial paper and certificates of deposit?
Leave government paper behind and the same short maturities arrive with a credit question attached. Two instruments dominate: one is a corporate liability, the other a bank liability, and the difference in how they pay is the first thing to get straight.
Commercial paper: unsecured, discounted, and short
Commercial paper (CP) is an unsecured short-term promissory note issued by a large corporation or financial firm to fund working capital — payroll, inventory, receivables. In the US, maturities run to a maximum of 270 days, because longer issues would require SEC registration; in practice most issuance is far shorter, from overnight to about 30 days. It is sold at a discount and quoted on the same discount basis as a T-bill.
Worked example. $10 million face, 30 days, quoted at a 5.10% discount rate:
P = 10,000,000 × (1 − 0.0510 × 30 / 360) = 10,000,000 × (1 − 0.00425) = $9,957,500
The issuer receives $9,957,500 today and repays $10,000,000 in 30 days. Cost of the money: $42,500.
Because CP is unsecured and buyers will not touch weak names, it is effectively a club for issuers with top short-term credit ratings. That produces its defining risk, which is not default but rollover risk: a CP programme funds long-lived assets with 30-day money and must be refinanced constantly. Nothing has to go wrong for it to break — investors only have to decline to roll. Issuers therefore maintain committed bank credit lines as backstops.
The variant with a history: ABCP
Asset-backed commercial paper is issued by off-balance-sheet conduits against pools of receivables and mortgages. On 9 August 2007, BNP Paribas suspended redemptions in three funds holding US mortgage assets, investors stopped rolling ABCP, and a market of roughly $1.2 trillion began to shrink hard. Many accounts date the financial crisis from that week. It is worth noticing where it started: not in equities, in a money market.
Certificates of deposit: the bank's side of the same block
A certificate of deposit (CD) is a time deposit with a fixed maturity and rate. A negotiable CD — an innovation of 1961 — is tradeable in the secondary market in large denominations. Unlike CP, a CD is interest-bearing: you pay face and receive face plus interest at maturity.
Worked example. A $10 million 90-day CD at 5.20%, actual/360:
interest = 10,000,000 × 0.0520 × 90 / 360 = $130,000
redemption = $10,130,000
The distinction to keep
CP is a corporate liability sold at a discount. A CD is a bank liability paying interest on face. Both are unsecured claims on one named institution — which is exactly what makes them useful (they yield more than bills) and exactly what makes them the first things sold in a scare. When investors want to stop taking any credit risk at all, they leave CP and CDs and buy bills. That rotation, visible in a widening gap between short bank rates and bill yields, is one of the oldest stress tells in the business.
Try it now
- Price a $25 million, 60-day CP quoted at a 5.00% discount rate. How much does the issuer receive, and what does the money cost?
- Compute the interest on a $25 million, 180-day CD at 5.00% on an actual/360 basis. Compare the two costs and note which convention flatters which.
- Below are the 4-week bill on 24 September 2026, and the dollar reference rates for the same date, where EFFR and OBFR sit. Put them on one basis first: the bill's coupon-equivalent yield counts a 365-day year and the overnight rates a 360-day one, so multiply the bill by 360/365. Then compare the bill with EFFR or OBFR. Both are short and high quality, but four weeks is not one night, so the gap mixes credit, liquidity and whatever the market expects overnight rates to do over the month. Describe its size and sign, and stop there.