Series 7 practice questioneasyMoney Market — Negotiable CDs — Scenario
An institutional investor purchases a $1 million negotiable CD with a 6-month maturity. After 3 months, the investor needs cash. What can the investor do?
- ARedeem the CD early at the bank with a small penalty
- BSell the CD in the secondary money market to another investor✓ Correct answer
- CConvert the CD to common stock of the issuing bank
- DNothing — the investor must wait until maturity
Explanation
Why B — Sell the CD in the secondary money market to another investor
Negotiable CDs can be bought and sold in the secondary money market, providing liquidity to investors before maturity. This is the key distinction from regular bank CDs, which cannot be transferred and impose early withdrawal penalties. The price in the secondary market will reflect current interest rates, so the investor may receive more or less than the original purchase price depending on rate movements.
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