What it means
A certificate of deposit (CD) is a savings product in which you deposit money for a fixed period, such as six months or five years. The bank pays a fixed interest rate and returns your money at the end.
If you withdraw early, you normally pay a penalty. A jumbo CD is the same product with a bigger minimum.
Banks have traditionally set the threshold at $100,000, although some use higher amounts. Because the sum is large, the bank may offer a slightly higher rate than on a regular CD, though this is not guaranteed.
Companies use jumbo CDs to earn a predictable return on surplus cash. A treasurer with funds that are not needed for the next year can place them in a jumbo CD and know the exact interest he will receive.
It is simple, with no market price swings. The main trade-off is access.
Your money is locked up until the term ends, and early withdrawal often means losing several months of interest. If interest rates rise while you are locked in, you also miss out on the better rates.
Safety depends on deposit insurance. Many countries insure deposits up to a limit per depositor per bank, and a jumbo CD can easily exceed that limit.
Check the current protection rules where you bank, and consider splitting large sums across institutions. Compare jumbo CDs with other options such as money market funds, short-term government securities and regular CDs.
The right choice depends on how soon you need the money, the rates on offer and your attitude to risk. Laddering, which means buying CDs with different maturity dates, can balance access and return.
In practice
Real-world examples.
Example
A software company has $250,000 of cash that it will not need for 12 months. Its finance manager places the money in a jumbo CD to earn a guaranteed return while keeping the principal safe. She sets a calendar reminder for the maturity date so the money is not rolled over by default.
Example
A retired investor sells a property and receives $300,000. She splits the money into three jumbo CDs at different banks so that each amount stays within deposit insurance limits. She also notes the maturity dates in a spreadsheet.
Example
A school bursar needs to fund a building project in 18 months. She buys a jumbo CD that matures just before the first payment, so the money is available when needed. The certainty of the date and the rate makes budgeting simple.
Formula
Calculation
Simple interest = Principal x Annual rate x Time in years
Suppose a business places $100,000 in a one-year jumbo CD at 4.0%, and a regular CD at the same bank pays 3.8%.
Jumbo CD interest = $100,000 x 4.0% x 1 = $4,000
Regular CD interest = $100,000 x 3.8% x 1 = $3,800
The jumbo CD earns $200 more over the year. The rates here are only examples, since real rates change with the economy and differ between banks. Most CDs also compound interest, which makes the true return slightly higher than the simple figure. For example, 4.0% compounded monthly gives an effective annual yield of about 4.07%, which is why banks quote the annual percentage yield.Case study
Seen in the real world.
This is a fictional illustration. Oakridge Dental Group, an invented practice, built up $400,000 in reserves after a strong year. The owners wanted the money to earn something without risking it.
The practice manager, Dev, compared a savings account paying 2.5%, a regular CD and a jumbo CD paying 4.0% for a one-year term. On $400,000 the jumbo CD would earn $16,000, against $10,000 from the savings account.
Dev placed $300,000 in the jumbo CD and kept $100,000 in a savings account for emergencies. When equipment repairs cost $30,000 unexpectedly, the practice used the savings account and did not have to break the CD, saving the early withdrawal penalty. Dev noted that matching the CD term to expected spending is the key discipline.
Watch out
Common mistakes.
- Locking up money you may need soon. Early withdrawal penalties can cancel out the interest earned. Match the term to when you will need the cash.
- Ignoring insurance limits. A large deposit may exceed the amount protected at a single bank. Spread large deposits across banks if needed.
- Assuming a jumbo CD always pays more. Some banks offer similar rates for regular CDs. Compare quotes from several banks.
Questions
People also ask.
What is a jumbo CD?
It is a certificate of deposit with a large minimum deposit, often $100,000 or more. The minimum is set by each bank.
Is a jumbo CD safe?
It is as safe as the bank and the deposit insurance that covers it, so check the limits. Limits are set by law and may change.
Can I take money out early?
Usually you can, but most banks charge a penalty, often several months of interest. Read the terms before you commit.
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