Negotiable certificates of deposit (NCDs) are fixed depository receipts that can be sold in a secondary market. They have a minimum face value of $100,000 and are sold by banks, with interest payments applied every six months until maturity. Large institutions are the most common buyers, and owners may sell them on the secondary market for quick cash in emergencies.
Also known as ENTs, negotiable certificates of deposit are fixed depository receipts that can be sold in a secondary market. Unlike other CDs, this type is structured so that the collateral holder can sell it to a third party. Like all types of CDs, it cannot be cashed out until the security has reached full maturity, even if the asset is sold.
Most banks that offer the option of a negotiable certificate of deposit require that the security have a minimum face value. While the required minimum face value is generally $100,000 in United States dollars (USD), it is more common for this type of CD to have a value of $1 million or more. In addition, the terms associated with this type of investment typically provide for interest payments to be applied every six months, until the point at which the security reaches maturity.
The bank that issues this type of investment product usually guarantees security, and is likely to arrange for its sale on a secondary market. Large institutions are the most common buyers of this type of CD, and they can use the asset as a means to generate a certain amount of additional return on the money invested in the purchase of the negotiable certificate of deposit, while not tying up those funds for more time. periods of time. In general, the strategy is to purchase the CD when it has no more than a year left to reach full maturity, allowing the new owner to enjoy a decent return in a relatively short period of time.
Because a tradable certificate of deposit can be sold repeatedly, an owner may choose to offer the asset on a secondary market as a means of generating quick cash in case of an emergency. For example, if a company that had invested in several NCDs suddenly needed money to rebuild production facilities damaged during a flood or other natural disaster, it might be possible to sell those assets and use the money to make repairs, without using a line of credit or waiting for the resulting insurance claims to be settled. While losing some of the projected return associated with the assets, the company may find that selling the NCDs is the most cost-effective way to restore operations and protect the business‘s profit margins. This is particularly true if the alternative would be to create debt that carries a higher interest rate than the interest lost by selling the NCDs.
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