What Is a Negotiable Certificate of Deposit (NCD)?
A negotiable certificate of deposit (NCD), also known as a jumbo CD, is a certificate of deposit (CD) with a minimum face value of $100,000, though NCDs are typically $1 million or more. They are guaranteed by the bank, often insured by the FDIC up to applicable limits, and can usually be sold in a highly liquid secondary market, but they cannot be cashed in before maturity.
Because of their large denominations, NCDs are bought most often by institutional investors seeking a low-risk, stable investment that typically offers higher interest rates than Treasury bills. NCDs grew in popularity as a secure option for managing large portfolios, with instruments like Yankee CDs serving as examples.
Key Takeaways
- Negotiable certificates of deposit (NCDs) have a minimum face value of $100,000 and are often utilized by large institutional investors.
- NCDs are guaranteed by banks and typically traded in liquid secondary markets, though they cannot be redeemed before maturity.
- These financial instruments offer higher interest rates compared to U.S. Treasury bills due to slightly higher risk.
- NCDs are insured by the FDIC up to $250,000 per depositor per bank, offering a level of security for investors.
- NCDs were introduced in 1961 to help banks with deposit shortages and allow investors a low-risk way to earn interest.
How Negotiable Certificates of Deposit (NCDs) Work
NCDs are short-term, maturing between two weeks and one year. Interest is usually paid either twice a year or at maturity, or the instrument is purchased at a discount to its face value. Interest rates are negotiable, and yield from an NCD is dependent on money market conditions.
The Evolution of Negotiable Certificates of Deposit (NCDs)
NCDs were introduced in 1961 by First National City Bank of New York, which is now Citibank. The instrument allowed banks to raise funds that could be used for lending. NCDs were designed to ease a deposit shortage that had affected banks during the previous decade. Many bank depositors transferred their cash from checking accounts, which did not pay interest, to other investments, such as Treasury bills (T-bills), commercial paper, and bankers’ acceptances.
The First National City Bank of New York loaned $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 NCDs. This grew to $30 billion in 1970 and $90 billion in 1975.
Participants in the market for NCDs primarily comprise wealthy individuals and institutions, such as corporations, insurance companies, pension funds, and mutual funds. The market draws investors looking for low-risk, liquid returns.
$250,000
The amount up to which the FDIC will insure an NCD.
Benefits of Investing in Negotiable Certificates of Deposit (NCDs)
One feature of the NCD is its low risk. The FDIC insures NCDs up to $250,000 per depositor per bank. This was increased from $100,000 in 2010 with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Therefore, the product attracts those who would invest in other low-risk investments, such as U.S. Treasury securities.
That said, NCDs are generally considered riskier compared with T-bills, which are backed by the U.S. government’s full faith and credit. As such, NCDs offer higher interest rates compared to those of Treasury bills.
Important
NCDs offer higher interest rates than Treasury bills.
Understanding the Risks of Negotiable Certificates of Deposit (NCDs)
Most NCDs can’t be redeemed by the bank before maturity. However, if a bank can call the NCD, it will do so when interest rates fall. Hence, investors will have difficulty finding another NCD that pays a similar rate of interest. The initial NCD rate is higher to compensate for this risk.
Where Can I Purchase an NCD?
NCDs are typically issued by banks and credit unions. They are also traded on the secondary market, which can be accessed through financial brokers.
How Much of a NCD Is FDIC or NCUA-insured?
NCDs are insured up to $250,000 per depositor per bank. Any amount over this is not insured.
What Is the Typical Term for an NCD?
NCDs are short-term investments with terms ranging from a week up to a year on average.
The Bottom Line
For investors with significant amounts of cash reserves, particularly institutional investors, NCDs offer a low-risk, short-term investment option with maturities typically ranging from two weeks to a year.
They provide higher interest rates than U.S. Treasury bills, though they lack the government’s full backing, and are insured by the FDIC up to $250,000 per depositor per bank. Introduced in 1961 to help banks manage deposits, NCDs remain a secure and liquid choice for earning stable returns.
