What Are Callable Certificates of Deposit (CDs)?

Callable CD

A callable CD (Certificate of Deposit ) is a time-specific deposit with a financial institution or bank. The account is an FDIC-insured deposit with a fixed rate of interest over the entire tenure and is usually higher than the regular savings account. In simple words to mention, it is an account with higher yields and lower risks.

With a callable CD, you have to hold a call protection period. In this period, the bank beholds the right to call away from the CD from you and shift the rate of interest. For example, if your call protection period is six months and your maturity period is two years, the bank holds the authority to shift the interest after six months.

Further to this, let’s take an insight into few terminologies, working principle, unique features, advantages and disadvantages of Callable CDs.

Important Terminologies Associated with Callable CDs

  • Callable Date: A callable date is a date on which the bank or the issuer can call your CD.
  • Call Protection Period: The period from the date of deposit to the callable date is the actual call protection period after which the banks or other financial issuers get the authority to shift the rate of interest based on the existing environment of interest rate. If the protection period is six months, the callable date will fall after every six months until the maturity date of the deposit.
  • Maturity Date: This is the actual date on which the period of your deposit expires. It is the actual duration of time for which bank or financial issuers behold the right to keep your deposited money.

Working Principle of Callable Certificates of Deposit

Callable CD gives the issuer more control over the investor’s money than the investor does. The callable date and the maturity date are pre-defined at the time of depositing the amount and opening a CD account with the bank or financial institution.  The CD issuer has all the right to redeem the callable CD before the actual maturity period and impels the investor to reinvest the money if the rate of interest drops and retain the money if the rate of interest rises. If in case the investor desires to withdraw the funds after the callable date, the issuer charges a high withdrawal penalty. For example, a particular bank issues a callable account in 2018 at 8% per annum with a maturity date of 2023 and callable date of 2020. In this scenario, the bank holds the right to call or redeem the account on the specified date in 2020.

Unique Feature of Callable CDs

The ‘Call’ feature is the uniqueness of this type of Certificate of Deposit. Associated with the fluctuating rate of interest in the money market, it adds to the risk of reinvestment because:

  • If the market rate drops, the issuer will reduce your callable rate of interest on the callable date and reinvest your money for a lower interest rate. In this case, the issuer redeems the CD and is liable to pay a premium on the principal amount if the investor withdraws the amount.
  • If the market rate rises, the issuer will retain the existing rate of interest and will make you keep your money until the maturity date keeping the investor stuck in a relatively low-interest paying investment option.

Advantages of Callable CD

Some of the key advantages of a callable certificate of deposit are as follows:

  • The interest rate is higher than the regular saving account.
  • There is no risk of losing the principal amount like that in the share market.
  • For a fixed period, the issuer pays a higher rate of interest that further rises or declines based on the market scenario.

Disadvantages of Callable CD

Some of the key disadvantages of a callable certificate of deposit are as follows:

  • Investors will not be able to enjoy a higher rate of interest if the market rate rises in future
  • Early withdrawals will lead to gain financial penalties
  • Confusing yourself with callable date and maturity date