What Is Callable Cd
| Certificate of Deposit or a CD can be described as a contract between the financial institution and the investor, where the investor is paid a specified rate of interest on his/her investment over a specified period of time, also called as maturity. |
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There are different varieties of CDs. One such variety is the callable-CD. In these types of CDs, the issuer owns a “call option” on the CD, using which he can redeem or call back the certificate of deposit from the investor well before the maturity date. Callable-CDs are ideal for investors looking for greater returns on their investment with limited risk.
In case of callable CD, the issuer indicates a callable date on the certificate of deposit. For example, if the callable date is six months, it means that the issuer can think about calling back once the CD completes the six months of issuance. The issuer will have the same option of calling back even after six months from the call date. Once the issuer calls back the CD, he pays the depositor the entire amount along with the interest accrued on the deposit for that period of time.
Changing interest rates are the most important reason due to which an issuer can call back the CD from the investor. If the interest rates are decreasing, this means that the issuer can get a debt at a far lower rate than the rate being paid to the depositor. Banks and other financial institutions issue callable-CDs with the sole objective of shifting interest-rate risk to the depositor.
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What Is Callable Cd