Negotiable Certificates of Deposit

As you might be able to tell from the name, negotiable certificates of deposit allow for greater flexibility than do traditional certificates of deposit. Two of the biggest differences come in the form of the amount of money required to buy a negotiable certificate of deposit, and the terms of the agreement. We’ll compare and contrast negotiable certificates of deposit to ordinary certificates of deposit below.

Minimum Investment Amount
Banks often require minimum investments of $50,000 to $100,000 in order to obtain a negotiable certificate of deposit. This amount, banks contend, is the amount at which it starts making sense for them to issue negotiable instruments to their clients, and the amount at which the investor gets the best return on their money, and the best return on their time to buy the product.

On the other hand, a traditional certificate of deposit will require an initial investment of no more than $10,000, with most being sold in denominations as small as $500 or $1000. This amount will vary by bank, and it is commonplace to find that banks will raise or lower the minimum investment amount depending on their current need for funding, or their promotional offerings.

Rates of Return
Negotiable certificates of deposit will always pay more than a traditional certificate of deposit. This is because banks spend as much time courting purchases of negotiable instruments as they spend attracting investors to traditional certificates of deposit. Also, banks tend to have a sliding scale of return based on the minimum investment, and will generally provide a higher rate of return to larger investors, thinking that if they enjoy their experience, then they are likely to use the bank for other products including checking, savings, or for personal loans and mortgages.

Safety and Security
Both negotiable and ordinary certificates of deposit are insured by the FDIC, or Federal Deposit Insurance Corporation, for up to $250,000 per person, per bank. As such, any investor who has less than $250,000 invested in any one bank is certain to receive back their initial investment plus accrued interest if the bank were to fail.

In terms of investments, this leads investors to think of negotiable certificates of deposit like they would US Treasury bonds or US Treasury bills because at the end of the day, both are backed by the same institution—the United States government. If the Treasury can’t pay up…well, then it is likely that the FDIC won’t be able to, either.

Cashing in
Another difference, though largely avoided by most investors, is that negotiable certificates of deposit are not redeemable before maturity. Traditional CDs, on the other hand, can often be redeemed for their current value minus a small early withdrawal fee.

That said a negotiable certificates of deposit can be cashed by selling the certificate of deposit to another investor. This transaction is completed on a highly-liquid market for debt securities, and most investors will find that they can receive top dollar for their CD within a matter of a few hours by soliciting a broker to sell the CD on their behalf. On the flipside of this transaction, negotiable certificates of deposit can also be purchased on the open market via a brokerage firm, or debt instrument broker. Keep in mind, however that smaller denominations are not sold on the open market, as their value relative to the commission that must be paid to buy and sell creates a hole in the market where it makes little financial sense to sell a low-value debt instrument such as an ordinary CD.

Callable CDs
In most cases, negotiable certificates are not callable—banks cannot buy them back before they mature—however, some brokers do sell callable negotiable certificates. Callable negotiable certificates of deposit provide for better yields, however, investors should be prepared to see their CD called by the bank if interest rates are to fall. The bank, then, will issue new CDs at a lower rate, effectively borrowing from someone else to buy your CD much like you might take out a mortgage to repay a previous mortgage, also known as refinancing.

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