Legal Definitions - negotiable certificate of deposit

A negotiable certificate of deposit is a type of savings account that holds a fixed amount of money for a fixed period, earning a fixed interest rate. What makes it "negotiable" is that, unlike a standard certificate of deposit, it can be bought and sold on a secondary market before its maturity date. These are typically issued by banks for large sums, often $100,000 or more, and are attractive to institutional investors or wealthy individuals looking for a secure, interest-bearing investment that also offers liquidity.

Here are some examples:

• Example 1: Corporate Cash Management

  A large manufacturing company, "Global Innovations Inc.," has a surplus of $5 million in cash reserves that it doesn't need for immediate operations but wants to keep liquid and earning interest for the next 18 months. Instead of leaving it in a low-interest checking account, Global Innovations Inc. purchases a negotiable certificate of deposit from a major bank. Six months later, an unexpected opportunity arises to acquire a smaller competitor, requiring immediate access to $2 million. Because their CD is negotiable, Global Innovations Inc. can sell a portion of it on the secondary market to another investor without waiting for the full 18-month term to mature, thus accessing their funds while still having earned interest for the period they held it.

  This illustrates a negotiable certificate of deposit because the company invested a large sum for a fixed period at a fixed rate, and critically, its ability to sell it before maturity on a secondary market provided the necessary liquidity for an unforeseen event.

• Example 2: Institutional Investment Strategy

  A university endowment fund, "Academic Growth Fund," manages billions of dollars and seeks stable, low-risk investments that can generate predictable income. To diversify its portfolio and secure a guaranteed return on a portion of its assets, the fund invests $10 million in a 2-year negotiable certificate of deposit from a reputable financial institution. Eighteen months into the term, the fund's investment committee decides to reallocate funds towards a new long-term infrastructure project. They are able to sell the negotiable CD to another institutional investor, such as a pension fund, on the secondary market, thereby freeing up the capital for their new project without incurring early withdrawal penalties that a non-negotiable CD would entail.

  This demonstrates a negotiable certificate of deposit as the endowment fund used it for a large, fixed-term investment with a guaranteed return, and its negotiability allowed them to adjust their portfolio strategy by selling the instrument before its original maturity date.