Are you looking to invest at least six figures in a certificate of deposit (CD)? Your search for the right CD might lead you to consider jumbo CDs or a similar — but less common — product called negotiable CDs (NCDs).
While a negotiable CD can look like an attractive option for large deposits, it's not likely to be your best choice. Why? First, you'll be hard-pressed to find a bank that still offers NCDs to individuals. Second, these CDs are often sold in denominations of $1 million, so they're mainly for institutions.
If you have the money to invest in an NCD, you might appreciate two features: You can sell these CDs before they mature and potentially negotiate your rate and other terms.
Negotiable CDs have a few characteristics in common with traditional, nonnegotiable CDs, but they're also distinct. With both types of CDs, you agree to deposit a set amount of money in return for guaranteed interest. Both are also low risk and come with FDIC insurance up to $250,000.
But when you look beyond the basics, NCDs have quite a few of their own unique features:
Issuance: They're only issued by certain types of financial institutions, including national and state-chartered banks, savings associations, and state and federal credit unions.
Rates: Interest can be fixed or variable, and rates are close to what you might earn on a Treasury bill. Rates are mainly determined by market forces, but sometimes, you can negotiate them with the issuer.
Negotiation: You can potentially negotiate the CD term and the frequency you receive interest payments. You may also be able to negotiate a higher interest rate based on competitor's rates or by promising to make additional deposits with the issuer.
Terms: The terms usually range from one month to one year, with the average maturity currently at just two weeks. You can't cash out an NCD before maturity, but you can sell it to other investors on the secondary market.
Amounts: The minimum amount you need to deposit in order to open an NCD is $100,000.
Payments: Interest is usually paid out at maturity; if the term is longer than one year, it's paid semi-annually. If you sell the CD, payment is due when the order is made.
Read more: CDs vs. Treasury bills: Maximizing your savings
Very few retail banks offer negotiable CDs to individual investors, but you may be able to find an NCD at a national or state-chartered bank, a savings association, or a state or federal credit union.
For example, the only negotiable CD we could find was from Ascend Federal Credit Union, which offers negotiable rates on six- to 24-month CDs when you deposit a minimum of $500,000.
Even if you can find an NCD to invest in, it's not likely to be your best choice.
Unlike traditional CDs, the rates on NCDs can be variable, meaning they fluctuate with the market. If your rate increases, the issuer may be able to "call" the CD, meaning they can terminate the account early. If rates decrease, you might be tempted to sell on the secondary market, but you'll have to list the CD at a discount and take a loss.
On top of that, FDIC insurance is limited to $250,000, so it's risky to invest more than that dollar amount into an NCD.
Read more: What is a callable CD?
Fortunately, NCDs aren't the only investment accounts that let you earn competitive interest rates on your short- and mid-term savings. Instead of investing in an NCD, consider one of these alternatives:
Treasury bills: Investing in T-bills is safer than CDs since every dollar is backed by the full faith and credit of the U.S. government. That means you don't have to worry about losing money if the bank fails, and you don't have to worry about being insured past $250,000.
Jumbo CD: Look for a jumbo CD that comes with a fixed interest rate and isn't callable. With this option, you lock in a guaranteed rate for the full term of the CD.
Brokered CDs: If you want the opportunity to sell your CD before it matures, look into brokered CDs, which can be bought and potentially sold on the secondary market. They do have several drawbacks, however, including the fact that they earn simple interest instead of compound interest and they're not always FDIC-insured.
Not all jumbo CDs are negotiable, but most of them are.
There aren't many banks that offer negotiable CDs for individual investors. You may be able to find one at a national or state-chartered bank or at a state or federal credit union.
You might be able to negotiate a higher interest rate on a negotiable CD by showing the issuer that their competitor offers higher rates.
Read more: Can you negotiate a higher savings account rate with your bank?
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