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A business customer with short-term excess liquidity, has decided to purchase a negotiable certificate of deposit...

A business customer with short-term excess liquidity, has decided to purchase a negotiable certificate of deposit issued by National Australia Bank. Explain what a certificate of deposit is.

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A certificate of deposit is a financial instrument issued by banks for depositing funds in the bank. The bank pays higher interest rate on the CD's compared to a savings account and they have a fixed maturity date. A depositor must wait till the maturity date to withdraw the funds and usually there is a penalty for withdrawing funds before the maturity period. CD's are issued for a short term period of 6 months to one year. Individuals or firms who have excess short term liquidity purchase CD's so that the funds earn some interest and do not remain idle . Unlike a traditional CD, a negotiable certificate of deposit allows the depositor to sell the CD in an open market before the maturity date.

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