Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Jumbo CD

What it is:

A jumbo CD is a certificate of deposit of $100,000, $1 million or more.

How it works (Example):

Let's say Company XYZ is a retirement fund for a firefighters' union. The fund manager expects interest rates to fall dramatically in the coming year and also does not want to put more fund assets in the stock market. Accordingly, he puts $1 million in a jumbo CD from Bank ABC, which is offering a rate of 3.25% for two years. By doing this, the fund manager locks in a 3.25% interest rate on the money; he expects interest rates to rebound when the CD matures.

Jumbo CDs are often bought and sold on secondary markets, meaning that if the fund manager realizes his predictions about interest rates are wrong, he can "get out" of the CD by selling it to a third party before the two years are up.

Note that Jumbo CDs often are not insured by the FDIC.

Why it Matters:

In general, CDs are low-risk investments, and the interest rates on CDs are often higher when the maturities are longer. Jumbo CDs have the extra advantage of paying a higher interest rate than traditional CDs, allowing large investors to make even more money.

[This was in note form. Read over and make sure it is now accurate.] A CD with a very large denomination, usually $1 million or more, is typically bought by institutional investors who are interested in low-risk investments. Jumbo CDs are usually in bearer form, and have secondary markets that are highly liquid. They are also called negotiable certificates of deposit.