Callable CD- Important Facts to Maximize Your Income
Bank deposit products are undoubtedly the safest bets these days due to the FDIC insurance. However, to maximize your potential income, you need to weigh out the benefits and risks involved in investing in the various types of CDs. For instance, if you want to invest in callable CD, you need to understand clearly how you can use this investment to achieve bigger returns. If you fail to do this before turning your money over to the brokerage firm or bank, you could end up becoming very disappointed.
Similar to a regular CD, a callable CD is a certificate of deposit that earns a fixed interest rate over a given duration. The unique feature that distinguishes this type of CD from a regular CD is that it can be redeemed or called away by the issuer prior to the maturity date, and at a present call price. However, this can only be done within a given period.
Besides distinguishing a callable CD from other types of CDs, it is also important to comprehend the important terms found on the fine print of your CD. For instance, you need to differentiate the maturity date from the callable date. A clear understanding of these two terms can help you avoid early withdrawal, which usually attracts a penalty.
The maturity date simply defines the period that the issuing bank can keep your money. Generally, the longer you allow the bank to keep your money, the higher the interest rate for your money, and vice versa. The callable date on the other hand, is the date that the issuing bank can call your CD if the interest rates go down. For instance, let’s say that the call date of your callable CD is six months. This indicates that six months after you buy the CD, and every six months after the call date, the bank can choose to take back the CD and return your investment with the interest earned. The actual amount of time that you commit your money could however be longer, probably in the range of 15 to 20 years.
The decision to call or not call your CD usually depends on the prevailing interest rates. If the interest rates go down, the bank may be persuaded to call your CD to avoid paying you higher interest rates than the prevailing rates. If the rates go up, the bank will probably decide not to call your CD so that it does not give you the higher rates. The good thing is that callable CDs are normally 0.5% to 1% higher in rate than regular CDs. If the above scenarios do not occur and the rates remain constant for some time, you can be able to maximize your potential earnings.
Before affixing your signature on the callable CD, it is imperative to make sure that you have all the facts right. You also need to consider the direction in which the interest rates are headed in the future. This way, you can make informed decisions that will help you maximize your potential income.
