How Do Negotiable Certificates of Deposit Work?

A negotiable certificate of deposit (CD) is a financial savings vehicle offered by a financial institution like a bank that usually requires a high minimum deposit of at least $100,000. When one opens a CD, the bank issues a certificate that guarantees the holder to be paid back her deposit plus interest. Similar to normal certificates of deposits, negotiable CDs last for a predetermined duration, and funds can't be withdrawn from the deposit account until the predetermined date. Typically, negotiable CDs operate on a short time horizon and mature (funds may be withdrawn) after a year or less. Some negotiable CDs may have longer terms, and offer higher interest rates. While negotiable CDs may not be cashed in before the date of maturity, there is an active secondary market for negotiable CDs where the certificates can be sold.

Because negotiable CDs require large deposits, they are typically held by institutional investors such as insurance companies and banks, and sometimes by wealthy individuals. Due to the large amounts of capital involved, which may differ significantly from one CD to another, the interest rates and maturation dates are subject to negotiation between the saver and the bank. A certain wealthy individual may only want to save his money for a specific duration, at a specific interest rate; banks that would not normally alter their rates or maturity offerings for normal individuals are more willing to negotiate deals when large amounts of capital are involved.

Because negotiable CDs are primary used as a short-term, low-risk, low-interest investment, government T-bills (short-term bonds) are a common alternative. CDs are considered somewhat more risky than T-bills, because the chances that a certain bank will fail are considered greater than the chance the government will fail. On the other hand, negotiable CDs typically offer higher interest rates to offset the increase in risk. Because the difference in risk is normally considered minute, negotiable CDs can be a way to earn a slightly higher return on idle capital.