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Also known as NCDs, negotiable certificates of deposit are fixed deposit receipts that can be sold in a secondary market. Unlike other CDs, this type is structured so that the holder of the security can sell it to a third party. Like all types of CDs, it cannot be cashed until the security has reached full maturity, even if the asset is sold.
Most banks that offer the option of a negotiable certificate of deposit require that the security has a minimum face value. While the minimum face value required is generally $100,000 in United States dollars (USD), it is more common for this type of CD to carry a value of $1 million USD or more. In addition, the terms related to this type of investment normally provide for interest payments to be applied every six months, up to the point that the security reaches maturity.
The bank issuing this type of investment product normally guarantees the security, and is likely to arrange for its sale on a secondary market. Large institutions are the most common buyers of this type of CD, and may use the asset as a means of generating some amount of additional return on the money invested in the purchase of the negotiable certificate of deposit, while not tying up those funds for extended periods of time. Generally, the strategy is to acquire the CD when it has no more than a year left to reach full maturity, thus allowing the new owner to enjoy a decent return in a relatively short period of time.
Because a negotiable certificate of deposit can be sold repeatedly, an owner can choose to offer the asset on a secondary market as a means of generating quick cash in the event of an emergency. For example, if a business that had invested in several NCDs should suddenly need money to rebuild production facilities that were damaged during a flood or other natural disaster, it would be possible to sell those assets and use the money to effect the repairs, without using a line of credit or waiting for any resulting insurance claims to be settled. While losing on some of the projected return associated with the assets, the company may find that selling the NCDs is the most cost-effective way to restore operations and protect the profit margins of the business. This is particularly true if the alternative would be to create debt that would carry a higher rate of interest than the interest lost by selling the NCDs.
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