What Is a Negotiable Certificate of Deposit (NCD)?
Let me explain what a negotiable certificate of deposit, or NCD, really is. It's essentially a certificate of deposit with a minimum face value of $100,000, though you'll often see them at $1 million or more. These are guaranteed by the issuing bank, and you can't cash them in before they mature, but you can sell them in a highly liquid secondary market.
Because of their size, NCDs are mostly purchased by large institutional investors who use them to park money in a low-risk, low-interest security. Think of something like a Yankee CD as a specific type of NCD.
Key Takeaways
To sum it up quickly, NCDs start at a $100,000 face value, they're bank-guaranteed, non-redeemable before maturity, and tradable in liquid secondary markets. They're viewed alongside U.S. Treasury bills as low-risk, low-interest options.
Understanding a Negotiable Certificate of Deposit (NCD)
NCDs are short-term instruments, with maturities from two weeks to a year. Interest gets paid either semiannually, at maturity, or you might buy them at a discount to face value. The rates are negotiable, and the yield depends on current money market conditions.
History of NCDs
NCDs came about in 1961, introduced by First National City Bank of New York, now Citibank. The goal was to help banks raise funds for lending during a deposit shortage from the previous decade. Depositors were shifting money from non-interest-bearing checking accounts to things like Treasury bills, commercial paper, and bankers' acceptances.
Citibank loaned $10 million in government securities to a New York broker who agreed to trade CDs, creating that secondary market. By 1966, outstanding NCDs hit $15 billion, growing to over $30 billion in 1970 and $90 billion by 1975.
Today, the market involves wealthy individuals and institutions like corporations, insurance companies, pension funds, and mutual funds. They're drawn to the low-risk, liquid way to earn returns on cash.
Advantages of NCDs
One key advantage is the low risk—NCDs are FDIC-insured up to $250,000 per depositor per bank, a limit raised from $100,000 in 2010 via the Dodd-Frank Act. This makes them appealing if you're considering low-risk options like U.S. Treasury securities.
That said, they're riskier than T-bills, which have the full backing of the U.S. government, so NCDs typically offer higher interest rates to compensate.
Disadvantages of NCDs
Most NCDs aren't callable, meaning the bank can't redeem them early. But if they are callable, the bank might do so when rates drop, leaving you struggling to find a replacement with similar yields. To offset this, the initial rate is higher.
Frequently Asked Questions
You can purchase NCDs from banks and credit unions, or trade them on the secondary market through financial brokers. They're insured up to $250,000 per depositor per bank by the FDIC—anything above that isn't covered. Typical terms range from a week to a year.
The Bottom Line
If you have a large sum of cash and a short timeframe, NCDs provide a safe, stable way to earn interest. Paired with Treasury bills, they give you liquidity and earning potential without the ups and downs of stocks or other higher-risk investments.
