Question

Why do Commercial Papers (CPs) inherently carry a higher risk level compared to Certificates of Deposit (CDs) and Treasury Bills?

Q: Answer-Why do Commercial Papers (CPs) inherently carry a higher risk level compared to Certificates of Depo...

Treasury Bills feature zero default risk due to sovereign backing, and CDs carry low risk as they are bank obligations backed by banking sector regulations. Commercial Papers are issued by private companies and NBFCs without any collateral asset backing. If the company goes bankrupt, investors face capital loss, giving CPs the highest inherent credit risk among these instruments.

A They are backed directly by the central bank.

B They are long-term instruments susceptible to interest rate shocks.

C They are unsecured instruments issued by corporate entities, subjecting investors to corporate credit risk rather than bank or sovereign guarantees.

D They have a minimum maturity layout of less than 7 days.

E They are always issued at a premium, increasing capital loss risk.

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