What Is a Negotiable CD?

Negotiable CDs Explained in Less Than 4 Minutes

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A negotiable CD (certificate of deposit) is a type of savings vehicle that usually requires a minimum deposit of $100,000.

Learn more about negotiable CDs and how they work so you can determine whether they make sense for you.

Definition and Example of a Negotiable CD

A negotiable CD is a certificate of deposit with a minimum face value of $100,000. Negotiable CDs are what they sound like: CDs with interest rates that you can negotiate. It may make sense if you have a large amount of cash and want to ensure you don’t lose any of your original investment.

Since a negotiable CD is guaranteed by a bank, it can be traded in a highly liquid secondary market. You can't, however, redeem the CD before it reaches its maturity date.

  • Alternate name: Jumbo CD

Since negotiable CDs require large amounts of cash, they’re usually only purchased by institutions and wealthy individuals.

For example, if you had $100,000 in your savings account you could use it to open a negotiable CD and earn an interest rate for a specific period of time, such as six months. After the six months were up, you could withdraw your money and put it back in your bank account.

How a Negotiable CD Works

Negotiable CDs were introduced in 1961 by the First National City Bank of New York, now known as Citibank. It allowed banks to raise funds during a time when investors and institutions were putting their money into bonds and other short-term securities, creating a shortage of deposit accounts.

With a negotiable CD, an institution or group of wealthy individuals negotiate the interest rate terms of the CD with a bank. Upon approval, the bank issues the funds to invest or lend. It also provides a certificate that guarantees the investors will receive their deposit and any interest earned.

When it comes to maturities for negotiable CDs, most range between a few weeks and six months. Interest on these savings accounts is paid bi-annually or at maturity. Negotiable CDs may also be sold at a discount to face value. The full amount will be paid once the CD matures.

Also known as primary market rates, interest rates on newly issued negotiable CDs are based on market conditions and may be negotiated.

Regular CDs vs. Negotiable CDs

A regular CD is a type of savings account with a fixed interest rate and fixed date of withdrawal. Since it offers a guaranteed return and typically earns higher interest rates than checking, savings, and money market accounts, it’s considered a safer kind of investment.

While negotiable CDs are very similar to regular CDs, there are a few key differences. Negotiable CDs feature a face value of at least $100,000 and short-term maturities, which range from a few weeks to six months or one year. In most cases, interest is paid bi-annually or at maturity. Interest rates are also usually negotiable and the yield is related to money market conditions.

Pros and Cons of Negotiable CDs

Before you consider opening a negotiable CD, keep these benefits and drawbacks in mind.

Pros
  • Short-term investments

  • Low risk

  • Can be sold

Cons
  • Must deposit a large amount of money

  • Minimal profit opportunity

  • No early withdrawal option

Pros Explained

  • Short-term investments: If you’re on the lookout for a short-term investment vehicle, you may benefit from a negotiable CD. You’ll be able to make some money without any long-term commitments.
  • Low risk: Once you invest money into a negotiable CD, you will make back your original investment plus interest. This makes negotiable CDs low-risk investment vehicles.
  • Can be sold: Even though you can’t withdraw money until negotiable CDs reach maturity, you may sell them. You may be able to meet other financial goals with the profit you earn.

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

Cons Explained

  • Must deposit a large amount of money: The minimum amount of money you can deposit in a negotiable CD is $100,000. If you don’t have this type of cash at your disposal, this product isn’t for you.
  • Minimal profit opportunity: Most financial institutions offer fairly low rates on negotiable CDs. Therefore, you can’t expect to make a very large profit.
  • No early withdrawal option: You can't withdraw the money early in a negotiable CD without penalties. This may be problematic if you face an expensive emergency expense.

Key Takeaways

  • Negotiable CDs are certificates of deposits issued in large amounts of at least $100,000.
  • These types of certificates of deposits are low-risk, short-term investments that can be sold.
  • While negotiable CDs do offer guaranteed profits, the money you earn is usually small, as most banks and other financial institutions usually offer low rates.