What is a Callable CD?

Callable Certificates of deposit is like any other CD but with a few minor twists. It is imperative that one understands the terms and conditions concerning a callable CD. In comparison to other CD’s they offer higher returns. They are FDIC insured. Reading between the lines is necessary before turning in your investment to a bank or a brokerage firm or one might end up very disappointed.

Comparison to a traditional CD

On the similar terms of a traditional CD a callable certificate of deposit pays a fixed rate of interest for the predetermined duration of time on maturation .The character that differentiates it from of any other form of CD is that the banks hold a god’s hand on your investment .it has the power to use the ‘call’ option on your CD for the full term before it matures.

How it works?

Consider an investor who invests in a callable CD with an interest of 6% on the principle amount with the time of maturation being 5 years and a call protection period of 12 months. This means the investor receives the interest  on the principle amount at the end of five years .Now consider the rates of interest drop to 4% due to a dip at the stock market ,the issuer looses his margin of profit and thus has the authority to call the CD on completion of the call protection period of twelve months. Now consider the interest rates soar to 7% during the term of the CD. The investor would be unable to liquidate his money for the reasons of reinvestment or at least not without penalty or a deduction of percentage of the interest.

Maturation period

The duration of time that the issuer keeps your money is known as the maturity date. The longer the maturity dates the higher the returns one could expect. It isn’t uncommon to find CD’s with maturation dates of 10-15 years.

DECIDE: callable or non callable

Considering all the loop holes associated with a callable CD one has to decide on the type of certificate of deposit that is more conducible to him. Having the liberty of the ‘call’ places the interest-rate risk on the investor. Hence since you are taking the risk the bank or the brokerage firm offers a higher rate of interest in comparison to a traditional CD. One should have a comprehensive knowledge of the stock market and should be able to predict its trends before deciding on a callable CD.