What Is a Call Certificate of Deposit?
Certificates of deposit are bank issued notes covering a variety of maturities and backed with the security of the United States' Federal Deposit Insurance Corporation guarantee up to certain limits. Today, CDs as they are commonly called can come in several variations. One variation is the callable certificate of deposit.
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What is a Certificate of Deposit?
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Bank issued certificates of deposits are short and intermediate loans from investors to a bank. They may range in maturities from 1 month to 10 years. They are guaranteed by the Federal Deposit Insurance Corporation for up to $100,000 and on occasion this amount has been raised to $250,000.
What are Callable Certificates of Deposit?
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Purchase a certificate of deposit for safety of principal. Some banks, fearful of rapid declines in interest rates will issue certificates whereby at the bank's discretion they will attach a call feature allowing them to redeem the certificate earlier than the notice, usually on 30 days' notice.
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What Does a Callable Certificate Mean to the Investor?
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Buying a certificate of deposit with a call feature, particularly one due in a few years, means that you are buying interest rate risk. This implies that if your certificate is called, you will have to reinvest your proceeds at the then prevailing, and lower, interest rate.
Should the Investor Be Paid for the Additional Risk?
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Buying a callable certificate of deposit means that you have taken on more risk. Callable certificates should yield substantially more than non-callable certificates. Banks probably would not call your certificates until they could save 2 percent per year on interest costs. On a 6 percent certificate that means the new certificate would yield 4 percent, a loss of 33 percent of your previous yield.
What Choices Does the Investor Have?
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Buy the callable certificate of deposit and you have no choice. Investigate other options. Look at slightly lower rates for the non-callable feature. Buy certificates at other banks or just buy shorter maturities where banks are less likely to call their certificates of deposit.
Investigate Your Certifcates Now
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Know what you own and call your banker to discuss forthcoming options. Banks probably will not reward you enough to take on call risk. Buy certificates without call features.
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