Question

A negotiable certificate of deposit:

a. Is fully insured by the FDIC.
b. Trades in the secondary market.
c. Is secured by specific assets of the bank.
d. Has a maximum maturity of one year.

Answer 1

A negotiable certificate of deposit (CD) is a financial asset that trades in the secondary market, allowing for enhanced liquidity. It is not specifically secured by the bank's assets and can have maturities longer than one year, and may not be fully FDIC insured.

Step-by-step explanation:

The student has asked about the characteristics of a negotiable certificate of deposit (CD). A negotiable CD is a type of financial asset that banks use to raise funds from investors. One of its key features is that it trades in the secondary market, which means investors can buy and sell them before they reach maturity. Unlike traditional CDs, which have restricted liquidity, negotiable CDs enhance liquidity by allowing for this trade. However, a negotiable CD is not secured by specific assets of the bank, and while they may have various maturity dates, there is no specific maximum maturity required by definition - they can have maturities longer than one year. Also, negotiable CDs may not be fully insured by the FDIC, as the FDIC typically insures deposits up to a certain limit, and negotiable CDs can be issued in amounts that exceed this limit.

Answer 2

A negotiable certificate of deposit (NCD) trades in the secondary market, is not fully insured by the FDIC, is not secured by the bank's assets, and can have various maturities, not exclusively up to one year.

Step-by-step explanation:

A negotiable certificate of deposit (NCD) represents a type of CD that differs from traditional CDs in several ways. An NCD is a short-term, fixed-income financial instrument issued by banks with large denominations, and has the unique feature of being tradable in the secondary market. This traceability allows investors to buy and sell NCDs before they mature, providing liquidity and the potential to capitalize on interest rate changes.

While NCDs are similar to traditional CDs in that they are time deposits offering a higher interest rate than standard savings accounts, they do not have the feature of being fully insured by the FDIC, as traditional, smaller denomination CDs do. The insurance limit for FDIC is typically up to the standard deposit insurance amount per depositor, per insured bank, for each account ownership category. Furthermore, NCDs are not secured by specific assets of the bank; rather, they are unsecured promissory notes.

As for the maturity, NCDs can vary. They typically have maturities ranging from two weeks to twelve months, though they might also come with longer maturities. Hence, saying they have a maximum maturity of one year is not accurate for all NCDs.