How Do Negotiable Certificates of Deposit Work?

A negotiable CD is one that can be bought and sold on a secondary market. The bank that issues the original certificate sets the face amount and interest to be paid. In general, the longer the term, the higher the interest rate. Negotiable CDs mature over relatively short periods, from two weeks up to a year. At maturity, the holder of the CD receives the face amount from the issuer and the CD expires. If the bank restricts the CD so that it can't be transferred by the holder, and sets a penalty for the return of principal before maturity, then the CD is non-negotiable.

Negotiable CDs come in large face amounts, in most cases $100,000 or more. They are sold either with a fixed interest rate, or at a discount to their "par" (face) value. In the latter case, the return of the face value amount at maturity represents the return on the investment. In some cases, the buyer and seller will negotiate the interest rate and the duration. The market for negotiable CDs includes wealthy individuals and institutions -- such as corporations, insurance companies, banks, pension funds, public treasuries and mutual funds -- seeking a decent return on a safe, fixed-income investment.

If you own a negotiable CD, you can sell it to to another party either directly or through a broker. The National Association of Securities Dealers Automated Quotation system provides current price information on negotiable CDs that have at least 14 days to run before maturity. If interest rates rise, and you're looking for a better return on your money, you would be motivated to find a buyer for the low-return CD you bought several months ago. On the other hand, if interest rates fall, your negotiable CD will gain in value, and you can realize a profit by selling it.

Negotiable CDs in the United States were first issued by the First National City Bank of New York in 1961. They were created as a way for banks to easily raise cash, at a time when many investors and institutions were putting their money in government bonds and commercial paper (loans between businesses). South Africa and England followed with their own versions of the negotiable CD later in the 1960s. In the U.S., large-denomination CDs are also known as "jumbo CDs," although not all jumbos are necessarily negotiable.