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A jumbo certificate of deposit is a CD that requires a higher minimum balance obligation than that required by traditional CDs. In return, the jumbo CD pays a higher rate of interest. A CD is a type of savings account that pays fixed or variable interest in exchange for depositors leaving their funds in the account until a specified date of maturity. A jumbo CD usually has a minimum balance requirement of $100,000. Although jumbo CDs have higher minimum balance requirements than traditional CDs, in return they pay a higher interest rate. Jumbo CDs pay investors a fixed rate of interest, helping to stabilize returns in an investment portfolio by partly offsetting market risk.
Traditional CDs typically offer a higher rate of return than do standard savings accounts or interest-bearing checking accounts. In this same vein, the jumbo CD will pay an even higher rate than is offered by traditional CDs. Jumbos receive a higher rate because they require a larger minimum investment than the standard CD. Most jumbo CDs start at $100,000, but some financial institutions offering them may have a few products with lower entry points.
Jumbo CDs are considered risk-free investments, because they’re insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). Credit unions also market jumbo CDs, and these funds find protection under the National Credit Union Administration (NCUA).
Investors receive the premium—based on the fixed interest rate—as compensation for not having access to their money over the life of the account. A one-year jumbo CD that pays 1.5% interest, for example, may require that the funds remain locked up in the account for one year. Jumbo CDs can have term lengths as short as a few days or as long as a decade. However, the standard range is between three months and five years. And the longer the term, the higher the interest rate returned on the funds invested.
Upon maturity of the CD, the financial institution returns the investor’s principal. Early withdrawals may be possible, depending on the terms of the product purchased. However, the investor will pay a penalty for early termination of the contract.
Large institutional investors are the typical customer for jumbo CDs. These large institutions include banks, some large corporations, and pension funds. Primarily, this is due to the high minimum balance requirements. These customers use jumbo CDs as a temporary investment vehicle, as some issuers have tenures for as little as seven days. The short-term maturities allow institutional investors and companies to earn interest on idle money for short periods before rolling the funds into other ventures.
Investopedia