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A Big Look Into Jumbo CDs

By manybanking.com Staff
Like traditional CDs, Jumbo Certificates of Deposit (CDs) are relatively safe investments that offer the opportunity to earn interest with minimal risk.

Category Product: 
CDs
Category Finance: 
Personal Finance
Keywords: 
Jumbo CDs, CDs, Investments, Banking, Banks, Markets, FDIC, Deposits, FDIC Insurance, Investor, Modest, CD Term, Interest Rates
Introduction: 

By manybanking.com Staff
Like traditional CDs, Jumbo Certificates of Deposit (CDs) are relatively safe investments that offer the opportunity to earn interest with minimal risk.

Jumbo CDs work just like traditional CDs, but they carry higher minimum balances, typically $100,000. All CDs are considered time deposits because an investor’s principal is inaccessible (without penalty) for a set term in exchange for a guaranteed interest return as dictated by the CDs fixed interest rate.

In general, the interest rates associated with CDs vary according to three factors -- prevailing market rates, amount of money invested, and the term of the CD. Jumbo CD rates are typically a little higher than traditional CD rates because of their high minimum investment. The longer the term on the CD, the higher the interest rate will be as well. The higher interest rate is meant to offset the disadvantage of investors having their money tied up longer. Additionally, different institutions adjust the rates according to their own cash flow needs.

Some Jumbo CDs allow additional deposits without extension of the original CD term. In these cases, a high-dollar minimum deposit, like $3,000, is common. The benefit of this feature is that investors can receive the same locked-in interest rate on new funds. Like traditional CDs, Jumbo CDs severely limit an investor’s access to the account prior to maturity. If the money is withdrawn early, the investor may forfeit some or all of the interest earned to date.

Because Jumbo CDs have such high minimum deposits, these investments are not realistic for average investors. Jumbo CDs are often only offered to businesses or to high net worth individuals. These instruments are also used by banks and pension funds as a low-risk place to hold cash while earning a modest amount of interest income. Jumbo CDs are useful cash instruments for individual investors looking to park funds temporarily while waiting for another investment opportunity. Jumbo CDs usually pay higher interest than other cash investments like money market accounts.

The high minimum deposit of Jumbo CDs poses one significant downside for investors, however. FDIC insurance coverage for bank deposits is typically capped at $100,000 per depositor -- joint and individual accounts are separately insured. Because of the banking crisis, the FDIC temporarily increased the coverage limit to $250,000. However, coverage is scheduled to revert back to $100,000 as of December 31, 2009. But, given the current, troubled state of the banking industry, it is possible that the increase in coverage could be extended, though that is not guaranteed.

In the new year, should the FDIC coverage revert to $100,000, any Jumbo CD deposits in excess of that amount would be vulnerable should the holding bank fail, including interest earnings on a $100,000 CD. For the moment though, these investments remain safe under the FDIC insurance umbrella.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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Jumbo CDs work just like traditional CDs, but they carry higher minimum balances, typically $100,000. All CDs are considered time deposits because an investor’s principal is inaccessible (without penalty) for a set term in exchange for a guaranteed interest return as dictated by the CDs fixed interest rate.

In general, the interest rates associated with CDs vary according to three factors -- prevailing market rates, amount of money invested, and the term of the CD. Jumbo CD rates are typically a little higher than traditional CD rates because of their high minimum investment. The longer the term on the CD, the higher the interest rate will be as well. The higher interest rate is meant to offset the disadvantage of investors having their money tied up longer. Additionally, different institutions adjust the rates according to their own cash flow needs.

Some Jumbo CDs allow additional deposits without extension of the original CD term. In these cases, a high-dollar minimum deposit, like $3,000, is common. The benefit of this feature is that investors can receive the same locked-in interest rate on new funds. Like traditional CDs, Jumbo CDs severely limit an investor’s access to the account prior to maturity. If the money is withdrawn early, the investor may forfeit some or all of the interest earned to date.

Because Jumbo CDs have such high minimum deposits, these investments are not realistic for average investors. Jumbo CDs are often only offered to businesses or to high net worth individuals. These instruments are also used by banks and pension funds as a low-risk place to hold cash while earning a modest amount of interest income. Jumbo CDs are useful cash instruments for individual investors looking to park funds temporarily while waiting for another investment opportunity. Jumbo CDs usually pay higher interest than other cash investments like money market accounts.

The high minimum deposit of Jumbo CDs poses one significant downside for investors, however. FDIC insurance coverage for bank deposits is typically capped at $100,000 per depositor -- joint and individual accounts are separately insured. Because of the banking crisis, the FDIC temporarily increased the coverage limit to $250,000. However, coverage is scheduled to revert back to $100,000 as of December 31, 2009. But, given the current, troubled state of the banking industry, it is possible that the increase in coverage could be extended, though that is not guaranteed.

In the new year, should the FDIC coverage revert to $100,000, any Jumbo CD deposits in excess of that amount would be vulnerable should the holding bank fail, including interest earnings on a $100,000 CD. For the moment though, these investments remain safe under the FDIC insurance umbrella.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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