Negotiable CDs are unsecured interest-bearing time deposits issued at face value. These money-market securities are typically issued by banks. The investor (the lender) loans money to the bank (the borrower) and in return receives semi-annual interest payments. The principal (face-value) and final interest payment is made to the investor at maturity. Other features of negotiable CDs include:
- If the CD’s face value is greater than $100,000 it is negotiable. A negotiable CD allows the owner to sell it in the secondary market to another investor at any point in time, i.e. prior to maturity. The CD does not need to be redeemed at the bank.
- During the life of the CD, the product may pay semi-annual interest payments
- The market value of the CD will depend on prevailing interest rates, and accordingly these products would face interest rate risk. i.e. if you have a 3% CD and rates go up to 6%, the value of your CD declines.
KNOPMAN NOTES:
It is important that test-takers identify negotiable CDs as money market securities. Money market securities are short-term (maturing in less than one-year), high-quality debt securities, and are typically suitable for investors seeking safety and principal protection. Don’t forget one very liquid way to invest in negotiable CDs is through a money market mutual fund. These investments will also generally produce monthly income.