what is a jumbo certificate of deposit cd 
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 interest rate a cd is a type of savings account that pays a fixed or variable interest rate in exchange for depositors leaving their funds in the account until a specified maturity date understanding jumbo cdstraditional cds typically offer a higher rate of return than standard savings accounts or interest bearing checking accounts and a jumbo cd will typically pay an even higher rate than traditional cds jumbos have 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 jumbo cds are considered risk free investments as they re insured up to 250 000 by the federal deposit insurance corp fdic 1 credit unions also offer jumbo cds and these funds find protection under the national credit union administration ncua 2investors receive the premium based on the fixed interest rate as compensation for not having access to their money over the life of the account a one year jumbo cd that pays 1 5 interest for example may require that the funds remain locked up in the account for one year jumbo cds can have term lengths as short as a few days or as long as a decade however the standard range is three months to five years and the longer the term the higher the interest rate returned on the funds invested upon maturity of the cd the financial institution returns the investor s principal early withdrawals may be possible depending on the terms of the product purchased however the investor will pay a penalty for early termination of the contract the amount up to which the fdic insures cds 1advantages of jumbo cdslarge institutional investors are the typical customers for jumbo cds these large institutions include banks some large corporations and pension funds primarily this is due to the high minimum balance requirements these customers use jumbo cds as a temporary investment vehicle as some issuers have tenures for as little as seven days the short term maturities allow institutional investors and companies to earn interest on idle money for short periods before rolling the funds into other ventures these jumbo cds are instruments for treasury management of large corporations and money market instruments for large investors other than being paid to park their funds in these products large investors use them as instruments to reduce their portfolio s market risk exposure market risk arises when prices in the stock market fluctuate over time as a result stock portfolios can earn high returns but they can also incur large losses the steady interest paid on jumbo cds helps offset and reduce the risk of negative returns that can happen from holding stocks a business seeking a loan or other type of financing from a bank can pledge its jumbo cd as collateral which is an asset held by a lender as security for a loan in case the borrower falls behind or defaults on the loan payments if the borrower defaults on timely payments the lender can seize the collateral to recoup any losses however cds held in retirement accounts cannot be pledged as collateral for loans jumbo cds can be used as collateral for loans disadvantages of jumbo cdsalthough jumbo cds have positive aspects of higher rates and fdic or ncua protection there are disadvantages to investing in them historically jumbo cds have paid a much higher rate than traditional cds and savings accounts nevertheless the differences between those returns have narrowed in recent years making a jumbo cd a less compelling investment jumbo cds don t typically keep up with inflation if the inflation rate in the economy is 2 for example and the interest rate on the cd is 2 5 then the investor is only earning 0 5 in real terms to make an investment in a jumbo cd worthwhile investors would need to lock in their funds for longer terms resulting in a higher rate 