How do investors benefit with a callable CD?

A callable CD is also another certificate of deposit which can be called before the date of maturity by the issuer.  The returns in this type of CD are much higher than the returns from a normal CD.  It is the investor’s assumption that there is higher risk involved with this type of CD.  Due to the fact that the investors can earn more with this CD, these callable CD’s have become a more viable option.

While investing in the standard CD the funds remain invested until the date of maturity and there is a definite sum that is invested.  After the date of maturity the investor is free to withdraw just the interest earned and reinvest the principal amount in another CD and thereby making a profit on the same principal amount.  Whereas, while the callable CD also provides the very same benefits, these CD’s give better returns in case the issuer leaves the investment till the time of maturity.

Benefits for the issuer:

With these CD’s the issuer has the option of shifting the risk in case there is a drop in the interest rates.  With the callable CD there is a guarantee that the issuers will stay invested only for a minimum period of time.  For instance, the issuer might make a provision which makes it possible to withdraw the amount from the CD after a period of six months instead of letting the CD remain for the entire time period.  In such cases when there is a drop in interest rates, the issuer could always call the CD after the minimum period of six months.  This allows the issuer to benefit out of situations like these.

Benefits for the investor:

The callable CD may be a better option for the investor also especially if there is an indication that the interest rates are likely to remain stable during the call-protection period then the investor could be rest assured that they will earn at least that amount by way of returns.  The longer the investor stays invested; his returns would also be higher.  However, with the callable CD the investor does not have the option of calling the CD.  This option only lies with the issuer.  Hence the callable CD is a better option for the investor only if he decides to remain invested for a long period of time for which the issuer will pay a higher rate of interest than the standard CD.