Jumbo Certificate of Deposit (by Gabe Alpert)

A jumbo certificate of deposit is a CD that requires a higher minimum balance obligation than that required by traditional CDs. In return, the jumbo CD pays a higher rate of interest. A CD is a type of savings account that pays fixed or variable interest in exchange for depositors leaving their funds in the account until a specified date of maturity.

Traditional CDs typically offer a higher rate of return than do standard savings accounts or interest-bearing checking accounts. In this same vein, the jumbo CD will pay an even higher rate than is offered by traditional CDs. Jumbos receive a higher rate because they require a larger minimum investment than the standard CD. Most jumbo CDs start at $100,000, but some financial institutions offering them may have a few products with lower entry points.

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Why is 'Jumbo Certificate of Deposit (CD)' the Term of the Day?

The Federal Reserve has raised its benchmark federal funds rate four times this year, from a range of 0% to 0.25% at the beginning of the year to its current range of 2.25% to 2.50%. And as the Fed raises interest rates, the rates on savings accounts, CDs, and jumbo CDs have risen as well. Over the past three months alone, the average rate for a 1-year jumbo CD has roughly doubled from 0.29% to 0.60%.

This comes amid increased volatility within the stock market, with the Cboe Volatility Index (VIX) having risen 27.7% over the past year, while the S&P 500 has declined 3.5%. If you are considering selling your stock holdings to buy other kinds of investments like CDs, keep in mind that selling stocks after a decline could lock in losses that may recover over the longer term. As such, selling stocks to invest in CDs or other short-term money market instruments might not be advantageous for those with long-term investment horizons. Withdrawing money from a CD early could also incur an early withdrawal penalty.

A jumbo CD functions similarly to a standard CD, except that it is significantly greater in size, requires a larger initial deposit, and pays a higher interest rate. A minimum deposit threshold of $100,000 is generally required to invest in a jumbo CD. Due to their size and higher deposit requirements, jumbo CDs are more typically used by large institutional investors and corporations, while standard CDs are the preferred investment option for individuals and retail investors.

Any decision on investing in a CD could depend on how well you believe the stock or bond market will perform during the duration of your investment. If you think the stock market will decline or trade sideways, then a CD may be a good investment. However, if you think that the markets will rise, you’ll need to compare the projected rate of increase with that of the CD. Then, you’ll likely need to discount the stock market return by how certain you are about your prediction.

-Gabe