A specialized type of deposit account offered by banks and credit unions, these instruments represent a time deposit with a fixed maturity date and interest rate. The defining characteristic is their transferability; the ownership can be conveyed from one party to another through endorsement and delivery. This feature distinguishes them from standard certificates of deposit, which typically cannot be sold or traded before maturity without penalty. An investor might purchase one of these instruments with a six-month term, earning a predetermined interest rate. If the investor requires access to the funds before the maturity date, they can sell the instrument in the secondary market.
Their significance lies in providing liquidity within the fixed-income market. They allow investors to access funds prior to the maturity date without incurring early withdrawal penalties from the issuing institution, albeit potentially at a market-determined price. The existence of a secondary market enhances their attractiveness as an investment vehicle, particularly for corporations and institutional investors managing large cash positions. Historically, these instruments emerged as a response to the need for short-term investment options that offered both competitive yields and liquidity.
