Jumbo CD

A jumbo CD is a certificate of deposit (CD) that requires a higher minimum balance requirement than traditional certificates of deposit and in return pay a higher interest rate. CDs are a type of savings account that pays a fixed rate of interest in exchange for depositors leaving their funds in the account until a specified date of maturity.

A certificate of deposit typically offers a higher rate of return than a standard savings account while Jumbo CDs pay a higher rate than traditional CDs. The higher rate is paid because Jumbo CDs require a larger minimum investment than the standard CD, typically set at $100,000, but it can be a lower amount. Investors are mainly compensated for not having access to their money over the life of the account.

Jumbo CDs offer investors a fixed rate of interest over the life of the CD. The interest paid is contingent on the funds remaining in the CD for the length of its term. For example, a one-year jumbo CD that pays 1.5% interest requires that the funds remain in the account for one year. Term lengths for jumbo CDs can be as short as a few days or as long as a decade, but the standard range of options is between three months to five years. The longer the term length, the higher the interest rate on the funds invested. Upon maturity of the CD, an investor can withdraw the funds without penalty.

Jumbo CDs are considered risk-free investments since they're insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) or if the funds are in a credit union, the National Credit Union Administration (NCUA).

• A jumbo CD is a certificate of deposit (CD) with 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 than conventional CDs.
• Jumbo CDs can be used by investors for their fixed-rates of interest, as collateral for loans, and to stabilize returns in an investment portfolio by partly offsetting market risk.

Jumbo CDs are typically bought and sold by large institutional investors, such as banks and pension funds, because of the high minimum balance requirement. Jumbo CDs can be used as a temporary investment vehicle since some issuers have tenors 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 investing the funds into other ventures.

Since Jumbo CDs pay a fixed rate of interest during their term, investors use these instruments to reduce the market risk in their investment portfolios. Market risk arises when stock prices fluctuate over time. As a result, stock portfolios can earn high returns, but they can also incur large losses. The steady interest paid on jumbo CDs helps offset and reduce the risk of negative returns that can occur from holding stocks.

A business seeking a loan or other type of financing from a bank can pledge its jumbo CD as collateral for the loan. Collateral is an asset held by a lender as security for a loan in the event the borrower falls behind or defaults on the loan payments. If the borrower defaults whereby payments cannot be made, the lender can seize the collateral to recoup any losses. However, certificates of deposit that are retirement accounts cannot be pledged as collateral for loans.

Although jumbo CDs, pay higher rates than savings accounts and are risk-free investments up to $250,000 per account, there are disadvantages to investing in them. Historically, jumbo CDs have paid a much higher rate than traditional CDs and savings accounts. However, the differences between those returns have narrowed in recent years making a jumbo CD a less-compelling investment.

Inflation Risk

Jumbo CDs don’t typically keep up with inflation. Inflation is a measure of the pace of rising prices in the economy. For example, if the inflation rate in the economy is 2%, and the interest rate on the CD is 2.5%, the investor is only earning 0.5% in real terms. To make an investment in a jumbo CD worthwhile, investors would need to lock in their funds for a longer term resulting in a higher rate.

Early-Withdrawal Penalties

If the money deposited is needed before the Jumbo CD matures, withdrawing the funds would result in a penalty charged. The penalty can be a fee assessed by the bank, or the investor might lose the interest earned to date. Each bank might have specific rules and guidelines for early withdrawals. If it's likely that the funds might be needed before the CD's maturity, investors might be better off investing the funds in an account that doesn't have withdrawal restrictions such as a high-interest savings account.

Interest Rate Risk

If interest rates rise while investors are holding a Jumbo CD, they miss out on the higher rates. Also, if interest rates fall by the time the CD matures, the investor might not be able to reinvest the funds at a comparable rate to the CD. Although jumbo CDs might pay a higher rate at the onset as compared to the other products, investors must weight the pros and cons to ensure they don't wind up with a lower return in the long-term.

Wells Fargo Bank (WFC) is a consumer bank in the U.S. that offers many types of CDs including jumbo CDs. Below are a few of the bank's jumbo CD rates and terms as of April 13, 2019.

• A six-month jumbo CD with a minimum $100,000 deposit pays 1.15%.
• A one-year jumbo CD with a minimum $100,000 deposit pays 1.25%.

Please note that the interest rates being offered by the bank can change anytime for new CDs and might be different depending on the state in which the depositor is located.