Negotiable certificate of deposit was used by financial institutes as well as the banks as early as in the year of 1960s to cope with their liability and unsafe conditions. In the latter half of the 1980s the Federal Reserve’s discontinued the use of such CDs because it hindered the collection of data. Since only the large banks, wealthy individuals and insurance companies held such certificates of deposit, which could be negotiated, the banks and such other financial institutes were open to negotiation with individuals who had high net worth.
Similar to traditional certificates of deposit, negotiable certificate of deposit were held by the banks or the financial institutes for a particular period of time. The funds fixed through the certificates of deposit could not be withdrawn before the predetermined date of maturity and doing so attracts penalty. The certificates of deposit which are negotiable mature in 1 year or less than a year, which means it is operational over a short time horizon. Before the purchase, the amount, date of maturity and the rates of interest together with the method of calculation of the interest are stated. Some of the larger certificates of deposits which are issued on greater denominations are one million dollars or more.
Even though quite a few of the investors compare negotiable certificate of deposit or T-bills, there are dissimilarities between them. The certificate of deposit, which are negotiable are risky because it is linked with a bank, while T-bills are associated withU.S. government so it is less risky than certificates of deposit that are negotiable. Other than that both are short term investment involving less risks and low rates of investments. NCDs are considered by most of the investors as a good place to house larger capitals, if they have higher rates of interests.
Based in issuer, there are four NCDs. The one which is issued by the bank is called domestic negotiable certificate of deposit. Those that are issued from abroad and denominated in dollars are called Eurodollar NCD. Some international U.S. branches issue Yankee NCD. At the same time, thrift NCDs is present, which are issued by associations of loans and savings.
The deposit amount of the certificate of deposits which are negotiable is quite high. So, only wealthy individuals, financial institutes and banks can afford to have them. It is usually in the range of hundred thousand dollars. A certificate is offered by the bank to the purchaser guaranteeing the purchaser to get back the entire amount of the deposit in addition to the interest over the amount. The interest rate and the time of the maturity are negotiated between two parties, the bank or financial institute or other organizations and the purchaser. There is a huge active market for the negotiable certificate of deposit. The original purchaser can sell the NCD to a new holder. In such circumstances, both parties benefit from the sell. Usually the market of sell in a secondary bazaar depends on the demand and supply as well as the prevailing rates of interest for the available CDs.