DEFINITION of ‘Jumbo CD’
A jumbo CD is a certificate of deposit (CD) with a minimum denomination of $100,000. Jumbo CDs have higher denominations than regular certificate of deposits, and allow investors to deposit a certain amount of money in return for interest earnings. These investments are considered low-risk, stable investments for large investors. They typically pay interest at a higher rate than lower denomination CDs.
BREAKING DOWN ‘Jumbo CD’
A certificate of deposit, or CD, is a financial product issued by banks to investors who purchase the CDs in order to earn interest on their investment for a fixed period of time. A CD typically offers a higher rate of return than a standard savings account and are considered risk-free investments insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). Term lengths can be as short as a few days or as long as a decade, but the standard range of options is between three months and five years. The longer the term length, the higher the interest rate on the funds invested.
A jumbo CD is a type of CD that requires a larger minimum investment than the standard CD, typically set at $100,000. In addition, the interest rate on a jumbo CD is higher than that of a conventional CD due to the large sum of money involved. Jumbo CDs are typically bought and sold by large institutional investors, such as banks and pension funds, because of the high minimum denomination. Investors are mainly compensated for not having access to their money over the contract period. The longer the time period and the higher the principal investment, the higher the interest payment will be. Upon maturity of the CD, which is anytime from seven days to five years, the investor can withdraw his or her funds without penalty.
Jumbo CDs can be used as a temporary investment vehicle for funds since some issuers have tenors for as little as seven days. This way, an institutional investor or business can earn interest on idle money for a short period of time before putting the funds to use in other ventures. In addition, a business seeking a loan or other type of financing from a bank can pledge its jumbo CD as collateral, as long as the certificate of deposit is not in a retirement account.
A disadvantage of jumbo CDs is that they don’t keep up with the inflation rate. For example, if the inflation rate in the economy is 2%, and the interest rate on a CD is 2.5%, the investor is, in effect, making 0.5% on his or her investment. To make investment in a jumbo CD worthwhile, an investor would have to lock in his funds for a longer term. If the money is needed sooner, withdrawing it would result in a penalty charged. Investors that will need access to their funds within a very short time frame may be better off depositing their funds in a high interest savings account which has comparable rates to a jumbo CD and can be withdrawn anytime.