Negotiable Certificate of Deposit (NCD): Features, Benefits, and Real-life Scenarios


Negotiable certificates of deposit (NCDs) are specialized financial instruments with a minimum face value of $100,000, although they often exceed $1 million. These CDs, guaranteed by banks, offer a low-risk, low-interest investment option. NCDs have a short-term maturity, ranging from two weeks to one year, and their interest rates are negotiable. In this article, we’ll delve into the world of NCDs, their history, advantages, disadvantages, and how to purchase them. Whether you’re a seasoned investor or new to financial markets, understanding NCDs can enhance your portfolio.

Negotiable Certificate of Deposit (NCD) defined

A negotiable certificate of deposit (NCD), sometimes referred to as a jumbo CD, is a specialized form of a certificate of deposit with a substantial face value, typically starting at $100,000 and often exceeding $1 million. These financial instruments are guaranteed by banks and can be sold in a highly liquid secondary market. However, unlike regular CDs, they cannot be cashed in before reaching maturity.

Understanding a Negotiable Certificate of Deposit (NCD)

NCDs are short-term investments with maturities ranging from two weeks to one year. Interest is typically paid either semi-annually or at maturity, and in some cases, these instruments are purchased at a discount to their face value. The interest rates are negotiable, and the yield from an NCD depends on the prevailing money market conditions.

History of NCDs

The concept of NCDs was introduced in 1961 by the First National City Bank of New York, which is now known as Citibank. These instruments were designed to help banks raise funds that could be used for lending. At the time, there was a deposit shortage affecting banks, as many depositors shifted their funds from non-interest-bearing checking accounts to other investments such as Treasury bills (T-bills), commercial paper, and bankers’ acceptances.

The First National City Bank of New York initiated a pivotal move by lending $10 million in government securities to a New York broker, who agreed to accept trades in CDs. This initiated the creation of a secondary market where NCDs could be traded. By 1966, investors held $15 billion in outstanding NCDs. This amount continued to grow, reaching more than $30 billion in 1970 and $90 billion in 1975.

Participants in the NCD market primarily include wealthy individuals and institutions, such as corporations, insurance companies, pension funds, and mutual funds. NCDs attract those seeking a return on their cash with a low-risk and liquid investment option.

Advantages of NCDs

One of the primary advantages of NCDs is their low risk. They are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor per bank, offering a level of security that appeals to risk-averse investors. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act increased this insurance limit from $100,000 to $250,000. Consequently, NCDs attract investors who favor low-risk investments, such as U.S. Treasury securities.

However, it’s important to note that while NCDs are relatively low-risk, they are considered riskier when compared to Treasury bills (T-bills), which benefit from the full faith and credit of the U.S. government. As such, NCDs tend to offer higher interest rates compared to those of Treasury bills, making them an attractive option for investors seeking a balance between security and yield.


Here is a list of the benefits and drawbacks to consider.

  • Low risk, insured by FDIC for up to $250,000 per depositor per bank.
  • Higher interest rates compared to Treasury bills.
  • Excellent liquidity due to the secondary market.
  • Non-callable, which means they can’t be redeemed before maturity.
  • Risk of reinvestment when interest rates fall.
  • Higher risk compared to Treasury bills.

Disadvantages of NCDs

One notable disadvantage of NCDs is that they are generally non-callable. This means that the bank cannot redeem the instrument prior to its maturity date. However, if a bank has the option to call the NCD, it is likely to do so when interest rates decline. Consequently, investors may have difficulty finding another NCD that offers a similar rate of interest. In such cases, the initial rate offered to the NCD holder is higher to compensate for this potential risk.

Where can I purchase an NCD?

Negotiable certificates of deposit are typically issued by banks and credit unions. Additionally, they are actively traded on the secondary market, which can be accessed through financial brokers. This secondary market enhances the liquidity of NCDs, making them a more versatile investment option


How much of an NCD is FDIC or NCUA-insured?

NCDs are insured up to $250,000 per depositor per bank by the FDIC. However, any amount held beyond this insurance limit is not protected. It’s crucial for investors to be aware of this insurance coverage when considering NCDs as part of their investment portfolio.

What is the typical term for an NCD?

Negotiable certificates of deposit are generally short-term investments, with terms ranging from a week up to a year on average. The specific term may vary depending on the issuing bank or financial institution. Investors should align the maturity date of their NCD with their financial goals and liquidity needs.

Investing in NCDs: A practical example

Let’s consider a real-world scenario to illustrate the benefits of negotiable certificates of deposit. Imagine you’re an individual investor with a substantial amount of cash, perhaps from the sale of a property or an inheritance. You want to secure your funds while also earning a reasonable return.

In this case, you decide to explore NCDs due to their low-risk nature. You approach your local bank or financial institution and inquire about available NCD options. After discussions with a financial advisor, you select a 6-month NCD with a face value of $150,000 and an annual interest rate of 2.5%. This choice aligns with your need for liquidity in the near term while generating income.

As you hold the NCD until maturity, you’ll receive interest payments semi-annually. After six months, you’ll have earned $1,875 in interest. At the end of the 6-month period, your initial principal of $150,000 will be returned to you. The FDIC insurance adds an extra layer of security, guaranteeing your investment up to $250,000 per bank. This real example showcases how NCDs can serve as a reliable and low-risk investment for individuals with substantial cash reserves.

Diversifying your portfolio with NCDs

When building a well-rounded investment portfolio, diversification is key. While stocks and bonds offer opportunities for higher returns, they also come with higher risks. NCDs, on the other hand, provide a low-risk, stable component that can help balance your portfolio.

For instance, if you have a portfolio that includes stocks and bonds, you can allocate a portion of your funds to NCDs. This can act as a safeguard against market volatility. Even when the stock market experiences fluctuations, your NCDs will continue to earn interest steadily. This diversification strategy can help you achieve your financial goals while minimizing potential losses.

Exploring NCDs in today’s financial landscape

It’s important to note that NCDs have evolved over time, adapting to the changing financial landscape. While they were initially introduced in the 1960s, NCDs continue to be a relevant and attractive investment option in today’s markets.

With advances in technology and the ease of access to financial information, investors can now explore a broader range of NCD options. Various banks and credit unions offer competitive rates and terms to suit different financial needs. Additionally, online platforms and financial brokers make it convenient to purchase and trade NCDs, enhancing their accessibility.

The prevalence of online banking and digital financial services has also streamlined the process of investing in NCDs. Investors can easily compare rates, terms, and maturity dates to make informed decisions. The transparency and flexibility offered by these digital tools have contributed to the popularity of NCDs among a wider range of investors.

The bottom line

For investors with significant cash reserves and a short investment horizon, negotiable certificates of deposit offer a safe and stable way to earn interest. When paired with Treasury bills, NCDs create a balanced investment portfolio, combining liquidity and earning potential without the volatility associated with higher-risk investments like stocks.

Frequently Asked Questions

What is the difference between an NCD and a regular CD?

An NCD, or Negotiable Certificate of Deposit, differs from a regular CD in terms of its face value and liquidity. NCDs typically have a minimum face value of $100,000 and are often over $1 million, while regular CDs have lower minimums. Additionally, NCDs can be sold in a secondary market but cannot be cashed in before maturity, unlike regular CDs.

Are NCDs a safe investment?

Yes, NCDs are generally considered a safe investment. They are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor per bank. This insurance provides a level of security, making NCDs appealing to risk-averse investors. However, it’s important to note that NCDs are still considered riskier compared to U.S. Treasury bills.

How do NCD interest rates work?

NCD interest rates are negotiable and depend on money market conditions. These rates can vary, and investors may have the opportunity to negotiate the terms when purchasing NCDs. The interest is usually paid either semi-annually or at maturity, providing some flexibility to investors.

Where can I purchase NCDs?

NCDs are typically issued by banks and credit unions. They are also actively traded on the secondary market, which can be accessed through financial brokers. This secondary market enhances the liquidity of NCDs, making them a more versatile investment option.

Can I redeem NCDs before their maturity date?

No, NCDs cannot be redeemed before reaching their maturity date. They are designed to be held until maturity, and early redemption is generally not allowed. However, in the rare event that a bank has the option to call the NCD, it may do so when interest rates fall, potentially leaving the investor with the task of finding a similar investment with a similar rate of interest.

Key takeaways

  • Negotiable certificates of deposit (NCDs) have a minimum face value of $100,000.
  • They are guaranteed by banks, cannot be redeemed before maturity, and can usually be sold in highly liquid secondary markets.
  • Along with U.S. Treasury bills, they are considered a low-risk, low-interest security.
  • NCDs offer competitive interest rates compared to other low-risk investments.
  • Investors should be aware of the FDIC insurance limit of $250,000 per depositor per bank.
  • The secondary market for NCDs enhances their liquidity and tradability.
  • NCDs are generally short-term investments with maturities ranging from weeks to a year.
View article sources
  1. The Negotiable CD: National Bank Innovation in the 1960s – OCC
  2. Negotiable Certificate of Deposit (NCD) – Corporate Finance Institute 
  3. Negotiable Certificate Of Deposit – What Is It, Examples, … – WallStreetMojo
  4. Commercial Paper: A Valuable Tool for Businesses – SuperMoney