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      Negotiable Certificate of Deposit: Investing Pros, Cons & Risks

      By Wasim Omar

      Published on

      March 15, 2023

      2:16 PM UTC

      Last Updated on

      May 26, 2023

      12:52 PM UTC

      Negotiable Certificate of Deposit: Investing Pros, Cons & Risks

      The study of banking instruments is a highly fruitful pursuit, as it involves gaining a deep understanding of some of the most traditional and long-withstanding investment avenues available in the market. Among these is the negotiable certificate of deposit which has stood against the test of time, and continues to be a mainstream investment for people looking to turn in a safe return on their savings, and large corporations to put their resources to the best use.

      As we will see in this article, the negotiable CD inherently has some unique features that set it apart from other banking instruments and in fact from other investment classes in general, making its understanding all the more critical.

      In this article, we give you the opportunity to learn all there is about this deposit type and understand why it has been the go-to banking investment for even the most novice of investors dotting the financial landscape.

      What Is Negotiable Certificate of Deposit?

      The negotiable certificate of deposit is a distinct type of deposit certificate, that can be bought and sold to a third party in the secondary markets, at a negotiated price. The bank would be dealing with whomever the holder is, and return the agreed-upon amount.

      This negotiable aspect makes the instrument highly flexible and allows holders the opportunity to prematurely redeem their investments by turning to buyers in the secondary markets. As such, it reduces the risk in the standard deposit certificate.

      To answer the question “What is negotiable certificate of deposit” it is also important to understand that negotiable deposit certificates take away the standard bank-customer dynamic and open it up to the market, where supply and demand can determine a sound value. It is thus a leap forward in banking investment.

      History of NCDs

      The origins of NCDs can be traced back to the 1960s. Before that, commercial paper was the dominant instrument in the debt market and was used largely by large corporations for financing purposes.

      The breakthrough came in 1961 when the US Fed finally approved banks to issue large denomination deposit certificates with maturity periods of at least 30 days. This was a major innovation and milestone for the short-term debt market.

      Over time, deposit certificates began seeing many changes such as maturity period reduction and increased flexibility.

      By the 1970s NCDs had entered the mainstream and had become a favorite due to their low risk and high liquidity. At this point the market began, for the first time, distinguishing between the negotiable vs. non-negotiable certificate of deposit.

      Fast forward to today, NCDs have stood the test of time and survived some of the most catastrophic events that rocked the financial world. They continue to be a popular name in the debt market, among a wide class of investors.

      Understanding Negotiable Certificate of Deposits

      As discussed, the defining feature of the negotiable CD is its ability to be bought and sold on the open market on negotiated terms.

      However, its price is determined based on a number of fundamental parameters, which the negotiation revolves around. The three most fundamental of these aspects are crucial elements to NCDs, and are described below as follows:

      • Interest Rate

        The interest rate is usually one of the first aspects that a potential buyer of an NCD would take into consideration when determining its price. This interest rate is initially set when the bank issues the CD to the investing party.

        It is worth noting that deposit certificates usually have a higher interest rate than saving accounts due to lower liquidity. However, negotiable CD rates will ultimately depend on the bank’s policies, investment terms, and economic conditions.

      • Maturity Term

        The maturity term is another highly important dimension of the NCD and determines its negotiated value in the market. The term is initially fixed with the bank and can range from a few weeks to an entire year.

        A buyer for this instrument in the secondary market would be incentivized to offer as low a price as possible, during the negotiation so as to recover maximum gain upon completion of the maturity term.

      • Principal

        The principal amount initially committed with the bank would be redeemed upon term completion along with interest earned for the period.

        If a CD holder wants to recover this amount before completion, he or she would need to sell the certificate to a buyer in the market prematurely with a diminished interest return. This price would effectively be the principal amount for the new holder.

      Examples of Negotiable CDs

      Example of negotiable certificate of deposit (CDs) include those offered by various banks and financial institutions. Some well-known examples (example of negotiable certificate of deposit) include:

      • Bank of America

        Bank of America (BAC) offers negotiable CDs with varying terms and interest rates. These CDs can be bought and sold in the secondary market.

      • JPMorgan Chase

        JPMorgan Chase (JPM) provides negotiable CDs that offer investors the flexibility to trade them in the secondary market before their maturity date.

      • Wells Fargo

        Wells Fargo (WFC) offers NCDs with different maturities and interest rates. These CDs can be bought and sold by investors in the secondary market.

      • Citibank

        Citibank offers NCDs that allow investors to trade them in the secondary market, providing liquidity and flexibility.

      • Barclays

        Barclays (BCS) is another financial institution that offers NCDs, allowing investors to buy and sell them in the secondary market.

      How Does a Negotiable CD Work?

      Here’s how a negotiable certificate of deposit works:

      • Investor Deposits Funds

        The investor deposits a specific amount of money, known as the principal, with the issuer of the negotiable CD. The issuer can be a bank, credit union, or other financial institution.

      • CD Terms and Conditions

        The investor and the issuer agree upon the terms and conditions of the negotiable CD, including the maturity date, interest rate, minimum investment amount, and any potential callable features.

      • Negotiable Instrument

        The investor receives a negotiable instrument, typically in the form of a physical certificate or an electronic record, that represents ownership of the negotiable CD. This instrument can be transferred or sold to other investors in the secondary market.

      • Interest Payments

        Throughout the CD’s term, the issuer pays periodic interest to the investor based on the agreed-upon interest rate. The interest can be paid at regular intervals, such as monthly, quarterly, or annually, depending on the terms of the CD.

      • Maturity and Redemption

        On the maturity date specified in the CD, the investor can redeem the CD and receive the initial principal amount along with any remaining accrued interest. Alternatively, the investor can choose to roll over the funds into a new negotiable CD.

      • Secondary Market Trading

        One of the key features of negotiable CDs is their traceability. Investors have the option to sell their NCDs to other investors in the secondary market before the maturity date, allowing for liquidity and potential capital gains or losses.

      Benefits of Investing in Negotiable CDs

      Investing in a negotiable certificate of deposit offers several benefits for investors. Here are some key advantages of investing in negotiable CDs:

      • Fixed Interest Rates

        NCDs typically offer fixed interest rates, meaning that the rate remains constant throughout the CD’s term. This provides certainty and predictability in earning interest income, regardless of fluctuations in the broader market.

      • Safety and Security

        NCDs are generally considered low-risk investments. They are often issued by reputable financial institutions such as banks and credit unions, which are subject to regulatory oversight and deposit insurance.

        This can provide investors with a sense of security knowing that their principal investment is protected up to certain limits.

      • Diversification

        Investing in NCDs can be a way to diversify an investment portfolio. CDs offer a different risk profile compared to other investments such as stocks or bonds. By including NCDs in a diversified portfolio, investors can potentially reduce overall risk and enhance stability.

      • Regular Income

        NCDs typically pay interest at regular intervals, such as monthly, quarterly, or annually. For investors seeking a steady stream of income, NCDs can be a suitable option, especially for those who prefer a fixed-income investment strategy.

      • Liquidity

        While traditional CDs are not easily liquid, NCDs offer the advantage of liquidity. They can be bought and sold in the secondary market before the maturity date, providing investors with the opportunity to access their funds if needed.

        This liquidity feature adds flexibility to the investment and can be beneficial in certain situations.

      • Potential Higher Yields

        NCDs often offer higher interest rates compared to regular savings accounts or shorter-term CDs. By investing in NCDs, investors may have the potential to earn higher yields on their investments while still enjoying a relatively low-risk investment vehicle.

      Advantages of Negotiable Certificates of Deposit

      There are a range of benefits to NCDs as investment vehicles, which make them so compelling to the market. Some of these pros are as follows:

      • Liquidity

        NCDs are highly liquid investments because there is a ready market available for buying and selling. This makes it far more flexible than a typical deposit certificate.

      • Low risk

        The degree of risk with NCDs is minuscule, as it is guaranteed to be redeemed by the issuing bank. As such, it is backed by the full faith and credentials of an established bank, which explains why it has such a ready market.

      • Higher interest rate

        Generally, NCDs report a higher interest rate, than typical deposits and saving accounts. This is to compensate investors for risk, as they can only be redeemed at the end of maturity.

      • Ease of investment

        Another compelling factor is that NCDs can be easily availed by any investor through brokerages or even banks. Furthermore, the minimum investment amount is a lot lower than they are for other securities.

      • Diversification

        NCDs are a great way for an investor to add some diversity to their portfolio, by the inclusion of a different asset class with a low degree of risk. Adding these certificates to a portfolio of equity investments could reduce overall risk.

        This makes it appealing to large investors such as pension funds or corporations, with large excess cash holdings.

      • Flexibility

        Flexibility is a key advantage of negotiable certificates of deposit (CDs). Unlike traditional CDs, which are typically held until maturity, NCDs can be bought and sold in the secondary market before their maturity dates.

        This allows investors to access their funds earlier if needed or take advantage of potentially more favorable investment opportunities. The ability to trade NCDs provides investors with greater flexibility to manage their investments based on changing financial needs or market conditions.

        Whether it’s the need for immediate liquidity or the opportunity to capitalize on a favorable interest rate environment, the flexibility of negotiable CDs allows investors to adapt their investment strategies more effectively.

      Disadvantages of Negotiable Certificates of Deposit

      Despite the long list of strengths that make the negotiable CD such an attractive investment vehicle, it also inherently has some drawbacks which are important to consider, before committing to them. These are as follows:

      • Interest-Rate Risk

        Perhaps the most concerning aspect of NCDs is their fixed interest rate aspect. Regardless of the interest rate fluctuations, this rate remains fixed, which would make it unattractive in high inflation and high-interest rate environments.

      • Limited Upside Potential

        Unlike in the case of stocks, commodities, and currencies, there is a cap to the upside limit of NCDs. This is because the bank has already specified the redemption amount, beyond which no gain can be expected.

      • Callable NCDs

        In certain cases, NCDs are callable, which gives the bank the right to redeem them before their full maturity.

        This exposes holders to reinvestment risk and potentially would cause a premature return of their funds against their planned investment horizons.

      Features of NCDs

      Although NCDs are shaped primarily by the terms of the issuing bank, and the preferences of the investors, there are a few features that set this debt instrument apart from others in the investment sphere. There are:

      • Issued by Banks

        NCDs are issued by banks or other financial institutions, and not by individuals, funds or corporations. This makes them safe, as the bank guarantees the payback.

      • Fixed Terms

        The maturity term for a negotiable CD is fixed, which means funds cannot be accessed before the specified term. Redeeming funds before this term could incur penalties and loss of interest income.

      • Fixed Interest

        The interest rate applied on NCDs is fixed and would remain so, despite fluctuations in the market.

      • Minimum Investment Amount

        NCDs typically come with a minimum investment amount, which differs from bank to bank. These are often sizeable sums, in order to be economically viable for the issuing institution.

      • Credit Rating

        The credit rating of the issuing party, or bank, is important in terms of the NCD, as it impacts the interest rate offered. A lower credit rating would translate to higher interest rates for compensation against risk exposure.

      • Low-Risk (and FDIC-insured)

        Negotiable Certificates of Deposit are considered low-risk investments due to their typically conservative nature. They are issued by reputable financial institutions, such as banks, and are often FDIC-insured.

        This insurance provides an added layer of protection to investors by guaranteeing their principal and accrued interest up to the maximum coverage limit allowed by law, typically $250,000 per depositor per institution.

        This feature offers peace of mind to investors as it mitigates the risk of losing their investment in the event of a bank failure.

      • More Liquid

        NCDs offer greater liquidity compared to traditional certificates of deposit. While regular CDs are held until maturity, NCDs can be bought and sold in the secondary market before their maturity date.

        This means that investors have the option to sell their NCDs and access their funds before the agreed-upon maturity period. This added liquidity provides flexibility, allowing investors to respond to changing financial needs or take advantage of other investment opportunities that may arise.

      • Riskier Than Treasury Bills

        While NCDs are considered relatively safe investments, they are still riskier than Treasury bills. Treasury bills are backed by the U.S. government and are considered virtually risk-free. On the other hand, NCDs carry some level of credit risk associated with the issuing institution.

        Investors need to assess the creditworthiness of the issuing institution before investing in NCDs to understand the level of risk involved.

      • Callable In Some Cases

        Callable NCDs have a feature that allows the issuer to redeem the certificate before its maturity date, typically at a predetermined call price. This feature provides flexibility to the issuer, as it enables them to adjust their liabilities and interest payments based on changing market conditions.

        However, from an investor’s perspective, this introduces a level of uncertainty as the issuer may choose to call back the NCDs when interest rates decline, potentially leading to reinvestment risk. Investors should carefully consider the potential callability of NCDs and their implications for their investment strategy.

      Drawbacks of Investing in Negotiable CDs

      Investing in negotiable certificates of deposit (NCDs) offers several advantages, but it’s important to consider the potential drawbacks of Certificate of Deposit before making any investment decisions. Let’s explore some of the key drawbacks of Certificate of Deposit:

      • Market And Interest Rate Risk

        One of the main drawbacks of Certificate of Deposit is its vulnerability to market and interest rate fluctuations.

        As fixed-income investments, NCDs are subject to changes in interest rates. If interest rates rise, the value of NCDs in the secondary market may decline, leading to potential capital losses if sold before maturity.

        Conversely, if interest rates fall, the opportunity to earn higher returns may be limited, as the fixed interest rate of the NCD remains unchanged.

      • Limited Accessibility

        NCDs may not be as easily accessible to individual investors compared to other investment options. They are primarily issued by banks and financial institutions, and investors typically need to meet certain eligibility requirements or have a large investment portfolio to gain access to these instruments.

        This limited accessibility can restrict investment opportunities for smaller investors who seek to diversify their portfolios.

      • Credit And Default Risk

        While NCDs are considered relatively low-risk investments, there is still the potential for credit and default risk. The safety of your investment depends on the financial health and creditworthiness of the issuer.

        If the issuer encounters financial difficulties or defaults on its obligations, there is a risk of not receiving the promised interest payments or even losing a portion or the entire principal amount invested.

        It’s crucial to carefully assess the creditworthiness and reputation of the issuing institution before investing in NCDs.

      Factors to Consider when Investing in NCDs

      Investing in negotiable certificates of deposit (NCDs) can be a prudent addition to your investment portfolio, but it’s important to carefully consider certain factors before making any investment decisions. Let’s explore some key factors to consider when investing in NCDs:

      • Issuer Creditworthiness And Ratings

        One of the primary considerations when investing in NCDs is the creditworthiness of the issuer. Since NCDs are debt instruments, it’s essential to assess the financial stability and reputation of the institution offering the NCD.

        Credit rating agencies assign ratings to issuers based on their ability to meet financial obligations. Higher-rated issuers are generally considered more creditworthy and offer a lower risk of default.

        Conducting thorough research and reviewing credit ratings can help you gauge the issuer’s financial strength and make informed investment decisions.

      • Maturity And Lock-In Periods

        NCDs have specific maturity dates, which determine the length of time your investment will be held before you can access the principal amount. It’s important to align the maturity period with your investment goals and liquidity needs.

        Longer maturity periods may offer higher interest rates but can tie up your funds for an extended period. Shorter maturities provide greater flexibility, allowing you to reinvest or access your funds sooner.

        Consider your financial goals, cash flow requirements, and risk tolerance when selecting the appropriate maturity period for your NCD investment.

      • Secondary Market Activity And Liquidity

        While NCDs are typically held until maturity, it’s important to consider the potential for liquidity needs. NCDs are negotiable instruments, meaning they can be bought or sold on the secondary market before their maturity date.

        However, the liquidity of NCDs can vary depending on market conditions and investor demand. Higher-demand NCDs tend to have more active secondary markets, providing opportunities for early liquidation if necessary.

        Evaluating secondary market activity and liquidity can help you assess your ability to exit your investment if needed before maturity.

      • Fixed Interest Rates

        The coupon rate is the interest rate offered by the NCD issuer. It determines the periodic interest payments you will receive. Higher coupon rates generally indicate better returns, but it’s important to assess the issuer’s creditworthiness alongside the coupon rate.

      • Tenor

        The tenor refers to the duration of the NCD investment, typically measured in months or years. Consider your investment timeline and financial goals to choose a tenor that aligns with your needs.

      • Payment Interval

        Evaluate how often the interest payments are made. Some NCDs offer monthly, quarterly, or annual interest payments. Choose a frequency that suits your cash flow requirements.

      • Earnings Calculation

        Understand how earnings or returns are calculated. Some NCDs have a simple interest calculation method, while others may follow a compound interest formula. Be aware of the calculation method to accurately estimate your potential earnings.

      Strategies for Investing in NCDs

      Investing in negotiable certificates of deposit (NCDs) can be an effective way to preserve capital and generate income.

      To make the most of your NCD investments, it’s important to consider strategic approaches that align with your financial goals and risk tolerance. Here are three strategies to consider when investing in NCDs:

      • Diversification and Portfolio Allocation

        Diversification is a fundamental principle of investing, and it applies to NCDs as well. By spreading your investments across different issuers, maturities, and interest rates, you can reduce the impact of any single NCD on your overall portfolio.

        Diversification helps mitigate issuer-specific risk and ensures that your investments are not overly concentrated in a single entity or sector. Consider allocating a portion of your portfolio to NCDs while diversifying across other asset classes for a well-balanced investment approach.

      • CD Laddering and Reinvestment

        CD laddering is a strategy that involves investing in NCDs with staggered maturity dates. Instead of investing all your funds in a single NCD with a long maturity, you can divide your investment into multiple NCDs with different maturities.

        This approach provides a regular income stream and allows you to reinvest your funds periodically as each NCD matures.

        CD laddering helps balance the trade-off between liquidity and higher interest rates, ensuring that you have access to a portion of your funds at regular intervals while still benefiting from longer-term interest rates.

      • Monitoring and Reviewing CD Investments

        While NCDs are generally considered low-risk investments, it’s important to actively monitor and review your CD investments. Stay informed about the financial health of the issuing institutions and any changes in their credit ratings.

        Regularly assess the interest rates offered in the market to ensure that your NCDs remain competitive. Additionally, consider reviewing your investment strategy periodically to make any necessary adjustments based on changes in your financial goals or market conditions.

      Risks Associated with Investing in NCDs

      While negotiable certificates of deposit (NCDs) offer several advantages, it’s important to be aware of the potential risks involved. Understanding these risks can help you make informed investment decisions. Here are two key risks associated with investing in NCDs:

      Credit Risk from Issuers

      One of the primary risks of investing in NCDs is credit risk, which refers to the possibility that the issuer may default on their payment obligations. It’s crucial to evaluate the creditworthiness and financial stability of the issuing institution before investing in their NCDs.

      Credit rating agencies provide assessments of issuer credit quality, which can serve as a valuable reference. Higher-rated issuers are generally considered more creditworthy, but they may offer lower interest rates.

      Conversely, lower-rated issuers may offer higher interest rates, but they come with a higher risk of default. Conduct thorough research and consider diversifying your NCD investments among issuers with varying credit ratings to mitigate credit risk.

      Interest Rate Risk

      Interest rate risk is another significant factor to consider when investing in NCDs. NCDs typically have fixed interest rates for a specific period. If interest rates rise after you’ve invested in an NCD, the value of your NCD in the secondary market may decrease.

      This is because newer NCDs with higher interest rates become more attractive to investors, reducing the demand for NCDs with lower rates. Conversely, if interest rates decline, the value of your NCD may increase in the secondary market.

      To manage interest rate risk, you can consider diversifying your NCD investments across different maturities. This way, you can take advantage of higher interest rates when your shorter-term NCDs mature while still benefiting from the stability of longer-term NCDs.

      Other Approaches Related to Negotiable Certificates of Deposit

      Negotiable certificates of deposit offer investors flexibility and potential advantages in the fixed-income market. However, it’s important to understand the different approaches and alternatives available when considering NCDs. Here are two key comparisons to consider:

      Regular CDs vs. NCDs

      Regular certificates of deposit (CDs) and NCDs are similar in that they are both fixed-income investments offered by financial institutions. However, there are some key differences between the two.

      Regular CDs are typically issued directly by banks or credit unions and are non-transferable.

      They have a fixed term and interest rate agreed upon at the time of purchase. In contrast, NCDs are issued by banks or other financial institutions and can be bought and sold on the secondary market before their maturity date.

      This allows investors to potentially benefit from liquidity and price fluctuations in the secondary market. While regular CDs are simpler and may be suitable for conservative investors seeking stability, NCDs provide greater liquidity and the potential for higher yields.

      Negotiable CD vs. Non-Negotiable CD

      Another important comparison is between NCDs and non-negotiable CDs. Non-NCDs, also known as traditional or retail CDs, are typically held until maturity and cannot be bought or sold on the secondary market.

      They offer a fixed interest rate and term agreed upon at the time of purchase, providing stability and predictable returns. On the other hand, NCDs can be traded in the secondary market, offering investors the potential for liquidity and the ability to capitalize on changing interest rate environments.

      However, NCDs may involve additional risks and complexities, such as market fluctuations and credit risk from the issuer. It’s important to carefully evaluate your investment goals, risk tolerance, and liquidity needs when deciding between NCDs and non-negotiable CDs.


      The negotiable CD represents an important part of the global debt market, that has been a mainstream instrument in the investment landscape for several decades. They are ideal for those seeking low-risk and high-liquidity debt instruments.

      NCDs boast a number of strengths that have made them so compelling since the 1970s. They offer a high degree of flexibility and ease of investment, among other core advantages, that set them apart from traditional banking investment products.

      With all their strengths, however, NCDs do have some limitations which investors must consider before committing funds to them.

      Despite potential drawbacks, NCDs are an important lifeblood of the financial spaces, having revolutionized the classical dynamic between banks and customers, by taking the product to the open market. It is thus a great leap forward in debt instruments.


      Where Can I Purchase an NCD?

      NCDs can be purchased from a typical bank or financial institution. They are also available with brokers, mutual funds, and online investment platforms.

      How Much of an NCD Is FDIC or NCUA-insured?

      Both the FDIC and NCUA insure up to $250,000 of each NCD, which applies per depositor and per bank. Any amount above this value will not be insured by these bodies.

      What Is the Typical Term for an NCD?

      NCDs are short-term debt instruments that can have a term spanning from as low as two weeks to an entire year. Interest is paid, either twice a year or upon redemption.

      Are All CDs Negotiable?

      No, not all CDs are negotiable. While NCDs can be bought and sold on the secondary market before their maturity, traditional or retail CDs are typically non-negotiable. Non-NCDs are held until maturity and cannot be traded or sold to other parties.

      Do NCDs Pay Interest?

      Yes, NCDs do pay interest. They are similar to traditional CDs in that they offer a fixed interest rate over a specified period. The interest is typically paid out to the investor at regular intervals, such as monthly, quarterly, or annually, depending on the terms of the negotiable CD.

      Who Pays The Highest Interest On Cds?

      The highest interest rates on CDs are typically offered by online banks and credit unions. These financial institutions often have lower overhead costs compared to traditional brick-and-mortar banks, allowing them to offer more competitive rates.

      Additionally, smaller banks and credit unions may be more focused on attracting deposits, which can result in higher interest rates for their CD products. It’s important to compare rates from different institutions and consider factors such as minimum deposit requirements and the overall financial stability of the bank when seeking the highest interest on CDs.

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