Callable CDs
What Is a Callable CD?
A callable CD (certificate of deposit) is a type of CD that allows the issuing bank to redeem or “call” the CD before its maturity date. If the bank exercises this option, it returns the investor’s principal and any accrued interest.
Callable CDs typically offer higher interest rates than traditional CDs to compensate investors for this additional risk.
Why It Matters
Callable CDs can provide higher interest income, but they also carry reinvestment risk. If interest rates decline, the bank may call the CD early, forcing investors to reinvest their funds at lower rates.
Understanding this feature helps investors evaluate whether the potential yield is worth the risk.
How Callable CDs Work
Callable CDs usually include:
- a fixed interest rate
- a maturity date
- specific dates when the bank may call the CD
If interest rates fall, the issuing bank may choose to redeem the CD early and refinance at a lower rate.
Example
An investor purchases a callable CD offering a higher interest rate than standard CDs. If interest rates drop significantly, the bank may redeem the CD early and return the investor’s funds.
Callable CD vs Traditional CD
- A callable CD allows the bank to redeem the CD early.
- A traditional CD typically remains active until maturity.
FAQs About Callable CDs
Why do callable CDs offer higher rates?
They compensate investors for the possibility of early redemption.
Can investors call the CD early?
No. Only the issuing bank has the option to call it.
Are callable CDs risky?
They involve reinvestment risk if the CD is redeemed early.
Related Terms
