Wednesday, May 13, 2009

Negotiable Bank Certificates of Deposit

Certificates of Deposit (CDs) are debt instruments sold by banks and other depository institution. A CD pays the depositor a specified amount of interest during the term of the certificate, plus the purchase price of the CD at maturity. For example, a $1,000,one-year CD paying 5 percent interest would pay $1,000 plus $50 interest at the end of one year (the term of the CD). today negotiable CDs are sold in large denominations (over $100,000) and can be resold in the secondary market. this makes negotiable CDs highly liquid. the original purchaser need not hold the CD to maturity or pay "a substantial penalty for early withdrawal" if he or she needs to liquidate the CD.Instead,the person can sell the CD in the secondary market at a price that will depend on the market interest rate in effect when it is sold.the use of CDs grew from $119 billion in 1976 to $416 billion in 1992.

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