Types of Commercial Paper
- Draft: There are three persons involved in this type of commercial paper: the drawer, the drawee, and the payee. A draft is a written order from one person the drawer to another person the drawee to pay the specified amount of money to a third party the payee.
- Note: Promissory Notes is the most popular type of commercial paper. The maker and the payee are the two parties involved in this transaction. The issuer or entity drawing the Commercial Paper as written confirmation of paying the specified amount to the payee upon maturity is known as the maker.
- Cheque: Compared to typical Commercial Papers, this is a different kind of instrument with a separate set of rules and restrictions. A cheque is a particular kind of draft and in this case, the bank is the drawee.
- Certificate of Deposit: A bank will issue this type of commercial paper and by doing so, it will accept the deposit made by the depositor. This instrument is a special kind of promissory note and carries all the information about the deposit, including the interest rate, maturity date, and maturity amount.
- Secured Commercial Papers: These commercial papers are assured by other financial assets and are also known as Asset-Backed Commercial Papers (ABCP).
- Unsecured Commercial Papers: These are the traditional commercial papers that are allotted without any security.
Advantages and Disadvantages of Commercial Paper: The advantages of commercial paper include flexibility, reliability, additional funds, etc., and its disadvantages include capital restriction, maturity period, etc.