Familiarize yourself with a callable CD

There are numerous vehicles of investment that are available to an investor. The terms and conditions of each one of them are different and have been designed to cater to varied requirements of the investor. Certificates of deposit, savings account, fixed deposits; money market accounts are the common investment options that are available.

Certificates of deposit

They are schemes where one’s investment is locked away for a particular duration and fixed rate of interest both of which are predetermined. The rates of interest are available to the investor only on maturation. Maturation refers the completion of the term of the CD. Traditional CD’s pose certain disadvantages. The rates of interest are fixed. Rates of interest have a direct correlation to the market. Consider there is a boom in the market, even though the rates have increased the investor isn’t eligible to the new and improved rates. Another disadvantage that a CD poses is the fact that the funds are locked. The money is not in a fluid state meaning the CD cannot be liquidated prior to the completion of the term. The cessation of which would incur a hefty fine.

What is a callable CD?

There are a plethora of CD’s available for the investor to choose from based on his requirements. One basic principle that is followed in finance is the fact that ‘higher the risks taken higher are the returns’

A callable CD is one that follows the basic plot of a conventional CD with a minor twist. The catch lies in the fact that the bank or a financial institution where one holds a CD has the power to terminate the CD prior to maturation. The bank has the power of the call option.

What is a call option?

The market values of any investment are always in a state of flux. Consider a situation where the market values have decreased considerably and maintain your CD is no more profitable to the financial institution, the institution has the power to decide the fate of your investment. It can either maintain your CD of it can decideto terminate it by using the ‘call option’. This gives the bank the upper hand as the bank can decide the fate of your CD. It is for precisely this reason that the rates of interest offered by this CD are higher compared to others. It is a stable form of investment that offers higher returns. The risk factor is minimized as a callable CD is FDIC approved.