Importance of reading the fine print on a callable certificate of deposit
A callable certificate of deposit is one that is offered by banks at a higher rate of interest than the prevailing interest rate. But there is a reason why the bank makes such a high offer on the interest rate for a callable certificate. The reason is that the bank has complete control over when the certificate can be revoked.
A certificate of deposit is an investment instrument which provides a much higher interest rate than a conventional savings bank account. the reason for this is that a certificate of deposit does not provide you with the liquidity that a bank account would provide. In the latter case you can very easily withdraw your money at any given time and not have to suffer any financial penalties. But in the former case, if you withdraw money at any given time you will be charged a penalty and your interest rates might also go down.
When you make a certificate of deposit you need to find out what the terms and conditions regarding the callable certificates are. The general mechanism is that when the interest rates rise, the bank will call or revoke the certificate. When this happens, your deposit tenure will prematurely come to an end. Your only option will then be to reinvest your money in some other certificate at a much lower rate. But if the interest rates fall, you will just have to continue holding the certificate.
You need to find out how many times in a year the bank is capable of doing such a thing. Also find out if you can withdraw your funds when the interest rates increase in the market. If you can do this, you will be able to reinvest your money in some other certificate at a higher interest rate. This will give you a lot of flexibility so that you can make more out of your investment in the long run. But this is almost like a liquid certificate of deposit. And hence obviously you will have to settle for a lesser interest rate on the certificate when you buy it.
Always ensure that you read the fine print in the agreement before you sign on the dotted line. There are a number of stories where people learn about the details of their certificate only after signing on the certificate.
The best way to find a good deal on a callable certificate is to ask around with friends and family. Getting referred to a certificate is a sure fire way to get a concrete fool proof deal. And while talking to the representatives of the bank, find out what the banks policy about calling a certificate is like. Normally banks will care to call a certificate only when the interest rate falls beyond a margin of two percent. So if your original interest rate was six percent, if the current interest rate falls below four percent your bank my call it. Again it depends on their needs and current economic scenario. If there is a concrete understanding between you and the bank that calling will be done only when the interest rate falls below a certain limit then you can be safe with your investment.
