A Negotiable Certificate of Deposit (NCD), also known as a jumbo CD, offers a secure way to invest large sums, typically starting at a minimum face value of $100,000—with most being $1 million or more. Guaranteed by banks, NCDs can’t be cashed in before maturity, but are often resold in highly liquid secondary markets.
NCDs are attractive to large institutional investors since they are low-risk, low-interest securities similar to U.S. Treasury bills.
Key Takeaways
- NCDs have a minimum investment of $100,000.
- They are backed by banks and can be sold prior to maturity in liquid secondary markets.
- NCDs are considered a low-risk, low-interest investment.
Understanding a Negotiable Certificate of Deposit (NCD)
These instruments are short-term, with maturities from two weeks to a year. Interest is paid either biannually, at maturity, or when purchased at a discount. The yield from an NCD depends on money market conditions, and their interest rates are negotiable.
Evolution of NCDs
NCDs were introduced in 1961 by First National City Bank of New York (now Citibank) to overcome a deposit shortage. They provided a way for banks to raise funds for lending by tapping into investments other than checking accounts.
This asset class quickly grew, with investors holding $15 billion in NCDs by 1966, $30 billion by 1970, and $90 billion by 1975. Wealthy individuals and large institutions, such as corporations, insurance companies, pension funds, and mutual funds, comprise the market for NCDs.
$250,000
The amount up to which the FDIC will insure an NCD.
Benefits of NCDs
NCDs are known for their low risk, insured by the FDIC up to $250,000 per depositor per bank. Increased from $100,000 in 2010, this was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. NCDs often attract those looking for low-risk investments similar to U.S. Treasury securities, but with potentially higher interest rates.
Drawbacks of NCDs
While most NCDs aren’t callable, banks may call them if they can, usually when interest rates drop. This poses a challenge for investors needing to find similarly profitable instruments. As compensation for this risk, interest rates on callable NCDs are initially higher.
How to Invest in NCDs
Banks and credit unions issue NCDs regularly. They are also traded in secondary markets accessible through financial brokers.
FDIC/NCUA Insurance
NCDs are insured up to $250,000 per depositor per bank. Any amount above this isn’t insured.
Typical NCD Terms
NCDs usually range from a week to a year, offering a flexible short-term investment solution.
The Bottom Line
For those managing substantial amounts of cash for short periods, NCDs offer secure, stable interest earnings. They provide an effective blend of liquidity and potential returns without the volatility seen in higher-earning instruments like stocks.
Related Terms: Certificate of Deposit, Treasury Bills, Low-Risk Investment, FDIC Insurance, Interest Rates.
References
- Office of the Comptroller of the Currency. “The Negotiable CD: National Bank Innovation in the 1960s (Cached)”.
- Federal Deposit Insurance Corporation. “Deposit Insurance at a Glance”.
- Federal Deposit Insurance Corporation. “Basic FDIC Insurance Coverage Permanently Increased to $250,000 per Depositor”.
- TreasuryDirect. “Treasury Bills”.
