Negotiable Certificate of Deposit (NCD)

What Is a Negotiable Certificate of Deposit (NCD)?

A negotiable certificate of deposit (NCD), otherwise called a jumbo CD, is a certificate of deposit (CD) with a base face value of $100,000 — though NCDs are typically $1 at least million. They are guaranteed by the bank and can generally be sold in a profoundly liquid secondary market, but they cannot be cashed in before maturity.

In light of their large denominations, NCDs are bought most often by large institutional investors that typically use them as a method for investing in a low-risk, low-interest security. A Yankee CD is one illustration of a NCD.

Understanding a Negotiable Certificate of Deposit (NCD)

A NCD is short term, with maturities going from two weeks to one year. Interest is generally paid either twice per year or at maturity, or the instrument is purchased at a discount to its face value. Interest rates are negotiable, and yield from a NCD is dependent on money market conditions.

History of NCDs

NCDs were introduced in 1961 by First National City Bank of New York, which is presently Citibank. The instrument allowed banks to raise funds that could utilized for loan. NCDs were intended to facilitate a deposit shortage that had affected banks during the previous decade. Many bank depositors transferred their cash from checking accounts, which didn't pay interest, to other investments, for example, Treasury bills (T-bills), commercial paper, and bankers' acceptances.

The First National City Bank of New York credited $10 million in government securities to a New York broker that agreed to accept trades in CDs. This created a secondary market in which the NCDs could trade. By 1966, investors held $15 billion in outstanding NCDs. That amount developed to more than $30 billion of every 1970 and $90 billion out of 1975.

Participants in the market for NCDs fundamentally contain wealthy people and institutions, for example, corporations, insurance companies, pension funds, and mutual funds. The market attracts those seeking a return on cash in a low-risk and liquid investment.

$250,000

The amount up to which the FDIC will protect a NCD.

Advantages of NCDs

One feature of the NCD is its low risk. NCDs are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor per bank. This was increased from $100,000 in 2010 with the section of the [Dodd-Frank Wall Street Reform and Consumer Protection Act](/dodd-frank-monetary regulatory-reform-bill). Therefore, the product attracts those who might invest in other low-risk investments, like U.S. Treasury securities.

That said, NCDs are generally viewed as riskier compared with T-bills, which are backed by the U.S. government's full faith and credit. Thusly, NCDs offer higher interest rates compared to those of Treasury bills.

NCDs offer higher interest rates than Treasury bills.

Disadvantages of NCDs

Most NCDs are not callable, meaning the bank cannot reclaim the instrument prior to the maturity date. Notwithstanding, in the event that a bank can call the NCD, it will do so when interest rates fall. Subsequently, investors will experience issues finding another NCD that pays a comparable rate of interest. The initial rate to the NCD holder will be higher to compensate the investor for this risk.

Highlights

• They are guaranteed by banks, cannot be reclaimed before their maturation date, and can for the most part be sold in profoundly liquid secondary markets.
• Alongside U.S. Treasury bills, they are viewed as a low-risk, low-interest security.
• Negotiable certificates of deposit are CDs with a base face value of $100,000.