Jumbo CD, Are They Risky

By: EconomyWatch Content Team   Date: 26 February 2010

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A jumbo CD is a certificate of deposit that has a very large denomination. For example, it could be as high as one million dollars. In many cases these types of CDs are not purchased by individual investors but by institutional investors who are looking to purchase an investment that is considered low risk. Also sometimes referred to as negotiable certificate of deposits, these CDs are most often in bearer form and come with secondary markets that are very liquid in nature.  The minimum for these CDs is usually in the range of $100,000. Besides being low risk investments they are also very stable investments.

A regular CD and a jumbo CD share the same characteristics. They are both time deposits because the principal of the money that is placed in the CD account is locked up for a specified span of time. This time period can range from three months to five years (or in some cases, six years). For leaving his money in a CD for a certain time period, the investor receives a guaranteed return at a fixed percentage rate that gets locked in when the CD is first purchased. The return is paid out to the investor when the predetermined period of time ends or when it reaches its full maturity.

A jumbo CD does not carry a great deal of risk, which makes it an excellent choice of investment for the conservative investor with lots of money to invest. CDs are FDIC-insured which means that the investor is guaranteed his interest (or return on the principal) even if the bank experiences financial problems or fails all together. It is important to stop here and say that the FDIC insurance will only cover money placed in CD accounts for up to $100,000. What this means is, that the FDIC does often not cover a jumbo CD, and any interest it earns. This is because the investment risk would be tremendous if the FDIC was willing to cover all certificates of deposits, regardless of whether they contained large sums or small sums of money.

As is the case with a smaller CD account, a jumbo one can provide a higher rate of return than if you chose to save your money in a savings account or in a money market account. The interest earned is directly connected to the length of time that the principal is locked in for. The longer it is the higher rate of return you can expect. To use a concrete example of this, a six year CD will boost a higher rate of return than a six month CD.
 


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