What is a defining characteristic of the certificate of deposit?

What is a defining characteristic of the certificate of deposit?

• A. It is non-negotiable
• B. It acknowledges a loan to the bank
• C. It is a negotiable instrument
• D. It represents equity shares in the bank

Answer: (C)

A certificate of deposit (CD) is indeed a negotiable instrument, which allows the holder to transfer ownership before maturity. This characteristic is significant because it permits the buying and selling of CDs in the secondary market. When a CD is treated as a negotiable instrument, the owner can often transfer it to another party, facilitating liquidity and providing flexibility for investors. In contrast, being non-negotiable would limit its transferability, which is not applicable to CDs. While a CD does acknowledge a loan to the bank, thereby functioning more like a secured borrowing agreement for the bank rather than simply a receipt for deposited funds. Furthermore, it does not represent equity shares; rather, it represents a fixed-income investment that earns interest over a predetermined period, unlike equity shares, which signify ownership in the bank itself.

A certificate of deposit (CD) is indeed a negotiable instrument, which allows the holder to transfer ownership before maturity. This characteristic is significant because it permits the buying and selling of CDs in the secondary market. When a CD is treated as a negotiable instrument, the owner can often transfer it to another party, facilitating liquidity and providing flexibility for investors.

In contrast, being non-negotiable would limit its transferability, which is not applicable to CDs. While a CD does acknowledge a loan to the bank, thereby functioning more like a secured borrowing agreement for the bank rather than simply a receipt for deposited funds. Furthermore, it does not represent equity shares; rather, it represents a fixed-income investment that earns interest over a predetermined period, unlike equity shares, which signify ownership in the bank itself.