What are Jumbo CDs?

Jumbo CD rates refer to those certificates of deposits involving large sums of money, usually in excess of $100,000. It differs from a traditional CD in way of the principle amount. FDCI recognizes those certificates of deposits with a principle lesser than a $100,000 and guarantees the return of the principle. Hence the Jumbo CD in comparison to a traditional CD carries a higher investment risk.

Characteristics

They resemble the conventional certificates of deposits in regard to the basic features. The invested principle is locked up for a certain time interval ranging from a short period of three months to duration as long as six years; hence, they are also referred to as ‘timed deposits’. At the time of investment the percentage of interest would be pre determined. The investor thus obtains a guaranteed return based on the percentage set at the time of investment for the complete duration until the certificate of deposit matures. The interest is payable at the time of maturation.

Jumbo CD is also referred to as a ‘negotiable certificate of deposit’. For large investors these are reasonably low risk stable forms of investments. In contrast to savings accounts, traditional CD, fixed deposits they offer a higher rate of return. Another feature of the jumbo CD is the fact that the longer the investment stays locked the higher the percentage of return. For example consider a principle investment of $200,000 maturing at a time frame of six months and one maturing at six years. The CD where the principle matures at six years would reap a higher rate of interest, Considering the duration of investment. A jumbo CD has a higher rate of return compared to a smaller CD for a similar period.

In comparison with the jumbo CD other savings vehicles have the advantage of liquidation prior to the completion or the term of maturity. Consider a jumbo CD acquired at an interest of 5%, with a lapse in time based on the market status the rate of interest increases to 6% the investor cannot liquidate his CD prior to maturation for the purpose of re- investment into a CD with the current rate of interest. Withdrawal of the CD would result in penalty charges or a forfeiture of a part of the returns. This is seemingly larger considering a jumbo CD.

Advantages

  • A Considerably  low risk investment
  • Higher rates of return in comparison  to other vehicles of investment

Disadvantages

  • The inability to liquidate the CD prior to maturation.

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