What Is a Negotiable Certificate of Deposit?

A negotiable certificate of deposit (NCD) is a certificate of deposit that differs from a conventional CD in that its terms are negotiated with the issuer.

Another difference is that it can be sold in the secondary markets before maturity. The NCD cannot be redeemed before maturity, but the investor can sell it to realize its value. The NCD is issued and guaranteed by a bank, usually with a minimum face value of $100,000. Like other CDs, it is insured by the FDIC for up to $250,000.

How Do NCDs Work?

Unlike regular CDs, an institution or wealthy individual will negotiate the terms of the CD with the bank.

Once agreed upon and issued, the bank will use the funds to invest or lend in order to earn a profitable net margin interest spread, and then pay the investor the agreed interest rate according to the terms of the CD.

Because of their size, NCDs are bought by institutions and high net worth individual investors to use as a cash management tool for large sums.

Maturities on NCDs can be anywhere from two weeks to one year. Interest is paid at maturity, or the NCD may be sold at a discount to face value and then the full amount paid upon maturity.

Who Insures NCDs?

NCDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000 per depositor per bank. They are insured at face value.

History of the Negotiable CD

Negotiable CDs were first issued by the First National City Bank of New York in 1961. They were created as a way for banks to raise cash at a time when investors and institutions were putting their money into bonds and other short-term marketable securities, creating a shortage of deposit accounts.