What is a Jumbo CD?
A jumbo CD is a certificate of deposit of $100,000, $1 million or more.
How Does a Jumbo CD Work?
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 Does a Jumbo CD Matter?
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.
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.
