Callable CDs are a type of certificate of deposit that can be terminated at the banks discretion after a specified time frame. A standard Certificate of Deposit, or CD, is a promissory note that is tendered by a financial institution, typically a bank or a credit union. CDs are characterized by a specific fixed interest rate, a date of maturity, and a may be offered for an amount of the institution’s choosing. A maturity period for a CD will typically fall between 1 and 5 years, although length may vary. An investor has the option to cash in the CD before it has reached the maturity period but will incur a penalty in doing so.
A Callable CD differs from a standard certificate of deposit in that the issuer has a call feature that allows lenders to call back the CD at any point after an agreed upon call protection period. This will result in the return of the investor’s initial expenditure in addition to any interest earned up to that period. This offers the issuing financial institution an opportunity to hedge against interest rates dropping significantly and leaving them with a portfolio of overpriced notes. In exchange for the insecurity of a Callable CD, the interest rate yield will be higher on a Callable CD than it would on a standard CD that does not contain a call option