- What Is a Secondary Certificate of Deposit?
- Non-Renewable Certificates of Deposit
- Are Certificates of Deposit Insured Per Account or Per Owner?
- How Do Certificates of Deposit Accrue Interest?
- Is There a Grace Period to Change My Mind After Opening a Certificate of Deposit?
- When is Tax Payable on a Matured Certificate of Deposit?
Certificates of deposit, or CDs, provide a fairly low-risk way to earn a return on your money. You deposit money at a bank for a certain period — a year, for example — and at the end of that period, you get your money back, plus interest. "Jumbo" CDs are large-denomination CDs that typically pay higher interest at maturity.
Jumbo CDs come with a high minimum-deposit requirement. In most cases, that minimum is $100,000, although Bankrate.com columnist Don Taylor notes that some institutions and financial dictionaries set the bar at $1 million. As with regular CDs, once you put money into a jumbo CD, you can't get it back from the bank until the maturity date. However, unlike with most CDs, you can usually sell a jumbo to someone else and recoup some or all of your money that way.
A customer with $100,000 to put into a CD is more attractive to a bank than one with only $500 to play with. Banks accept deposits, and pay interest on them, so that they have money to lend out to other customers. A jumbo CD buyer can bring in more money, and more money in a single transaction, than a whole lot of other customers put together. For that reason, banks typically pay a higher interest rate on jumbos than on regular CDs. How much higher depends on many factors, including interest rates in the broader market and the demand for loans by the bank's other customers.
Jumbo CDs are usually negotiable, meaning you can sell them to someone else. In fact, jumbos are sometimes referred to simply as "negotiable CDs." Conventional CDs, on the other hand, typically aren't negotiable; when you buy one, it's issued in your name, and you're the only one who can collect on it at maturity. There's an active secondary market for jumbos, which gives their holders the ability to convert them into cash before maturity. The price you get for a jumbo CD on that secondary market depends on interest rates for similar available investments. If the rate offered by the CD is higher than the return on comparable investments, the price will rise. If it's lower, the price will fall.
Jumbo CDs issued by banks are generally safe investments, but because they can be so large, there is a risk if the bank itself fails. Deposits at banks are federally insured up to $250,000 per customer at each bank. CDs are insured deposits. But if you have, say, $300,000 in a jumbo CD at a bank, and the bank fails, only $250,000 of your money would be insured. You'd lose $50,000. If you also had, say, $100,000 in other accounts at that bank, then you'd lose $150,000.