What is a Jumbo Certificate of Deposit (CD)?

A jumbo certificate of deposit is a type of CD where the minimum balance requirement is more significant than regular CDs. The Jumbo CD offers a greater interest rate in exchange. A certificate of deposit (CD) is a kind of savings account that offers either variable or fixed income to depositors who hold their money until a predetermined maturity date.

Understanding  jumbo CD

Compared to interest-bearing checking accounts or ordinary savings accounts, traditional CDs usually offer a greater rate of return. In keeping with this, the jumbo CD will pay a much higher rate than regular CDs. Because they have a higher minimum investment requirement than regular CDs, jumbos have higher rates. Although certain financial institutions that provide jumbo CDs may have a few products with lower entry points, most start at $100,000.

The Federal Deposit Insurance Corporation (FDIC) insures Jumbo CDs up to $250,000, making them risk-free investments. Jumbo CDs are another product that credit unions sell, and the National Credit Union Administration (NCUA) provides security for these investments.

As compensation for not having access to their money during the account’s term, investors get a premium based on the set interest rate. For instance, a one-year jumbo CD with 1.5% interest would mandate that the money stay in the account for an entire year. Term durations for Jumbo CDs range from a few days to ten years. On the other hand, the typical range is three months to five years. Additionally, the interest rate return on the invested funds increases with the length of the period.

The financial institution reimburses the investor’s principal when the CD matures. Depending on the specifics of the product you bought, you might be able to withdraw money early. If the investor wants to end the contract early, they must pay a penalty.

Benefits of Extra-Jump CD

Jumbo CDs usually find their typical consumer in large institutional investors. These big organizations comprise pension funds, banks, and some sizable enterprises. This is primarily because of the stringent minimum balance restrictions. Because some issuers have tenures as short as seven days, some consumers employ jumbo CDs as a transient investment instrument. Institutional investors and businesses can earn interest on idle cash for brief periods before using the funds for other projects, thanks to the short-term maturities. Huge organizations use these jumbo CDs as treasury management tools, while huge investors use them as money market products.

Large investors utilize these products as tools to lower the market risk exposure of their portfolios, in addition to receiving payments to park their money in them. When stock market prices change over time, market risk develops. Consequently, stock portfolios have the potential to generate significant profits but also significant losses. The consistent interest rate on jumbo CDs serves to mitigate and lessen the possibility of unfavorable returns from stock ownership.

A company can use its jumbo CD as collateral when applying for a loan or financing from a bank. Collateral is an asset that a lender holds as security for a loan if the borrower fails or falls behind on payments. The lender may take possession of the collateral to cover any losses if the borrower fails to make payments on schedule. Nevertheless, CDs kept in retirement accounts are not eligible to be used as loan collateral.

It is possible to utilize Jumbo CDs as loan collateral.

The drawbacks of jumbo CD

Investing in jumbo CDs has drawbacks despite its benefits, which include higher rates and FDIC security. Jumbo CDs have historically paid a rate significantly higher than regular CDs and savings accounts. However, in recent years, the gaps between those returns have closed, which makes investing in jumbo CDs less alluring.

Risk of inflation

Generally speaking, jumbo CDs don’t keep up with inflation. In practical terms, the investor is only making 0.5% if the CD’s interest rate is 2.5% and the economy’s inflation rate is, for instance, 2%. Investors would have to lock in their money for longer durations, resulting in a higher rate, for a jumbo CD investment to be profitable.

Penalties for early withdrawal

If the holder needs the money before the jumbo CD matures, they will have to pay a financial penalty, which might be a cost that the bank charges for the interest they haven’t yet received. There will be particular norms and regulations for early withdrawals from each bank. If investors believe they need the money before the CD matures, they could be better suited to putting it in a high-interest savings account or another type of account with no withdrawal penalties.

Risk of interest rates

Interest rate risk is another concern for investors in jumbo CDs. This happens when interest rates on the open market increase above what the Jumbo CD offers. If investors hold jumbo CDs and interest rates climb during that time, they forfeit the excellent rates they would have received if they had been allowed to use that money for other investments.

Risk of reinvestment rate

In contrast, the investor might be unable to reinvest the money at a rate equal to the CD at maturity if interest rates decline over the holding term. Reinvestment risk is the term for this danger. Although jumbo CDs initially pay a greater rate than other products, investors must consider the advantages and disadvantages to ensure they won’t end up with a lesser return over time.

Advantages

• Jumbo CDs provide a consistent interest rate for the duration of the holding period.
• Generally speaking, jumbo CDs provide higher interest rates than regular CDs or savings accounts.
• Jumbo CDs’ consistent interest payments help reduce the market risk of holding equities, which might result in negative returns on the portfolio.
• The FDIC or NCUA will guarantee jumbo CDs up to $250,000 per account.

Disadvantage

• Jumbo CDs give a lesser return than many other fixed-rate assets, including bonds.
• Jumbo CDs are subject to interest rate risk in a rising market scenario when investors may keep CDs paying a lower rate.
• Since jumbo CDs usually don’t keep up with inflation, prices may increase more quickly than the CD’s rate of return.
• Before the jumbo CD matures, investors cannot access their money without paying an early withdrawal penalty.
• The minimum balance requirements for Jumbo CDs might be rather large.

Jumbo CD examples

The 1934-founded Veridian Credit Union in Waterloo, Iowa, sells a variety of CDs, including giant CDs.The following are instances of the jumbo rate as of September 27, 2023:

• With a $100,000 minimum deposit, a nine-month jumbo CD pays 0.40%.
• With a $100,000 minimum investment, a 15-month jumbo CD pays 5.60%.

Note that the interest rates on new CDs are subject to change at any moment and may vary based on the depositor’s state of residence.

Which is a Jumbo CD’s shortest term?

Even though these incredibly brief durations are rare, jumbo CD terms can last as little as a few days. Usually, a jumbo CD has a three-month minimum duration.

Is the interest rate on jumbo CDs higher than on regular CDs?

Banks and credit unions usually offer savers more excellent interest rates on jumbo CDs than on smaller accounts since jumbo CDs have a considerably larger minimum deposit requirement. Additionally, longer durations have higher interest rates. These higher rates serve as a motivator to decrease your funds’ liquidity.

To what extent is my Jumbo CD protected by the FDIC or NCUA?

The FDIC or NCUA insures the first $250,000 of each account associated with a bank or credit union.

The Final Word

Large CDs are a very secure way to store cash. Banks are ready to give savers competitive interest rates in return for set terms. Even though jumbo CDs are secure, they might not be the best option if interest rates fluctuate. You can miss out on the chance to invest at a greater yield if interest rates increase and you have a long-term CD. When choosing a term duration, give it significant thought.

Conclusion

• Typically, a jumbo CD requires a minimum balance of $100,000.
• Jumbo CDs pay a greater interest rate in exchange for having more extensive minimum balance requirements than standard CDs.
• Jumbo CDs provide investors with a fixed rate of return while partially reducing market risk, which helps to stabilize returns in an investment portfolio.