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Callable CDs

What is a callable CD?

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Updated: November 16, 2023

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A callable CD (certificate of deposit) is a type of low-risk investment. While you generally receive a fixed interest rate, the issuer can terminate the CD before its maturity date. If this happens, you’ll still receive your initial investment (principal) and any interest earned until that point. You just won’t receive future interest payments.

In contrast, a traditional CD cannot “call back” the loan early. Given the risk of losing potential earnings, callable CD interest rates tend to be 0.5% to 1% higher than regular certificates of deposit. The higher rates compensate investors for the added investor risk. This guide will walk you through everything necessary about callable CDs, including how they work, their pros and cons, and the best alternatives.

Callable CD definition

A callable CD, or certificate of deposit, is a low-risk investment that generally has a fixed interest rate. The downside is that the issuer can terminate the CD before its maturity date. If the CD is called early, the investor receives their initial investment (principal) and any interest earned until that point, but future interest payments are forfeited. Callable CDs usually provide higher interest rates than regular CDs to account for the increased risk of early termination.

How do callable CDs work?

When you invest in a callable CD, you'll select a term, like 12 months or five years, and deposit your money. Most CDs have a minimum deposit requirement of $500 to $1,000, which is generally FDIC-insured. An initial non-callable period prevents the issuer from terminating the CD too early. This is followed by the callable date, the earliest date the issuer can “call back” the CD. After the callable date, the issuer can terminate the CD before it reaches maturity.

While issuers may not always terminate the CD during the callable window, they have the option to. If the issuer terminates the CD before maturity, you’ll receive your initial investment principal back and any interest earned until then. The issuer will generally only terminate the CD early if interest rates drop throughout your term. This is because they can refinance their cost of financing to a lower interest rate loan.

To illustrate how a callable CD works, let’s assume you deposit $10,000 into a five-year callable CD with a 4% APY. In the first two years, you earn $816 in interest. After two years, the CD enters the callable period, and the issuer terminates it. At this point, the bank returns your $10,000 principal and the $816 interest earned until that date. You won’t earn the remaining three years of interest but can immediately reinvest into another CD.

While issuers can terminate callable CDs early, investors face more restrictions. You usually cannot withdraw your money from a callable CD without facing an early withdrawal penalty (EWP). These penalties can be steep, such as forfeiting several months' interest. Some investors use a CD ladder strategy to avoid penalties, which avoids locking all your funds away in a long-term investment.

Important terms to know

  • Callable date: The earliest the bank can terminate or "call back" the CD. There's usually a non-callable window before the callable date. 
  • Maturity date: This is the full term you agree to invest for, like five years. You’ll receive your initial investment and any interest earned at the maturity date. You will not reach the maturity date if the CD is called before. 

Annual percentage yield (APY): CD interest rates are commonly expressed as an APY. This is your investment return when considering compound interest.

Callable vs. non-callable CDs

Callable CDs
Non-callable CDs
Issuer's ability to terminate early
Yes, after callable date
No
Investor’s ability to withdraw early
Limited, may face penalties
Limited, may face penalties
Interest rate
5% - 6% APY
5.5% - 7% APY
FDIC-Insured
Up to $250,000 per financial institution
Up to $250,000 per financial institution

In general, callable CD interest rates are 0.5% to 1% higher than non-callable CDs because there is a risk of the issuer terminating it early. Issuers benefit from callable CDs if interest rates drop during the term. This is because they can terminate the CD and refinance to a lower cost of borrowing. As an investor, this is less beneficial to you.

For example, let's assume market interest rates drop during your term, and the issuer terminates your CD. As the investor, you would be forced into a lower-rate environment and lose the higher interest rate you initially expected.

With a non-callable CD, you will maintain the higher interest rate, even if market rates decrease. As such, non-callable CDs are with it to lock in a guaranteed rate if you expect decreases throughout your term. However, callable CDs generally provide higher interest rates to compensate investors for this risk. 

As the investor, both callable and traditional CDs have restrictions on early withdrawals. This means you’ll experience penalties for withdrawing your funds before the maturity date. While the penalties vary, they’re generally a few months’ interest earned. The penalties increase with the duration of your CD. This means a five-year CD will have more significant penalties than a one-year CD. 

In addition, both options are FDIC-insured. This means your deposits are protected up to $250,000 per financial institution. Depositing more than this amount in the same institution can revoke protection on the incremental amount.

Pros

Pros

  • Higher interest rate

  • FDIC insurance

  • Fixed interest rate

Cons

Cons

  • Call risk

  • Early withdrawal penalties

Pros:

  • Higher interest rate: Callable CDs tend to offer higher interest rates than regular CDs because of the call risk.
  • FDIC insurance: Callable CDs are FDIC insured just like traditional CDs, so your principal is protected up to $250,000 per insured bank.
  • Fixed interest rate: The interest rate on a callable CD is generally fixed for the CD term, providing more predictability. 

Cons:

  • Call risk: If the bank calls the CD before maturity, you lose out on any remaining interest payments. This call risk is the tradeoff for the higher rate.
  • Early withdrawal penalties: Withdrawing funds early from a callable CD is subject to penalties. You can avoid penalties only if the bank calls the CD first.

Alternatives to callable CDs

A callable CD is a low-risk investment with a fixed interest rate. While the issuer can terminate your CD early, investors have penalties for early redemption. As such, alternatives are available to investors who prefer higher interest rates or flexibility.

Type
Description
Interest Rate
Withdrawal Penalty
Additional Details
Traditional CDs
Locks in money for a set term with lower interest rates
Lower
Yes
Minimum deposit: around $500 to $1,000
Jumbo CDs
Requires a high initial deposit for higher interest rates
Higher
Yes
Initial deposit: around $100,000
No-penalty CDs
Offers flexibility to withdraw funds without penalty
Lower
No
Lower interest rate in exchange for flexibility
Variable CDs
Interest rates adjust with underlying benchmark
Variable
Yes
Ability to invest in different underlying benchmarks
Brokered CDs
Callable CDs purchased through a middleman
High
No
Purchased through your trading account
High-yield savings accounts
Easiest withdrawals with lowest interest rates
Lowest
No
No or low minimum balance requirements
Money market funds
Invests in short-term securities with flexible withdrawals
Variable
 No
No FDIC insurance
Bonds
Debt securities providing predictable income
Variable
Varies
Treasury Bonds, Municipal Bonds, Corporate Bonds, Bond Funds

Traditional CDs

Traditional CDs lock in your money for a set term, without the risk of early termination. However, they offer lower interest rates than callable CDs. Minimum deposits are generally around $500 to $1,000. Withdrawing early incurs a penalty of several months of interest.

Jumbo CDs

Jumbo CD interest rates are higher but require an initial deposit of around $100,000. They are available as callable or traditional CDs. Withdrawal penalties still apply for early termination.

No-penalty CDs

No-penalty CDs allow you to withdraw funds without any early withdrawal penalty. You’ll generally receive a lower interest rate than a traditional and callable CD in exchange for the flexibility.

Variable CDs

Variable-rate CDs have interest rates that fluctuate based on an underlying index, such as the Prime Rate. The interest rate may change monthly, quarterly, or at other intervals. This allows investors to benefit from rising interest rates. However, variable CD rates can also decrease when rates decline.

Brokered CDs

Brokered CDs are offered through brokerage firms instead of through banks. The brokerage firm purchases a large block of CDs from banks and resells them to investors in smaller pieces. As an investor this streamlines investing by letting you purchase through your trading account rather than a bank. While brokered CDs are also callable, investors can trade out of them without penalties. As such, they provide a great combination of convenience, flexibility, and a higher interest rate. 

High-yield savings accounts

High-yield savings provide the easiest withdrawals to your money but generally have the lowest interest rates. They generally have low or no minimum balance requirements. However, interest rates fluctuate more than CDs, which have a fixed rate.

Money market funds

Money market funds invest in a basket of short-term securities like the ones mentioned in this section. They provide diversification across various short-term instruments. The major differences from callable CDs are money market funds have flexible withdrawals, variable returns, and no FDIC insurance.

Bonds

Bonds are a broad category of debt securities. They function differently than CDs but can also provide predictable income. Short-term bonds are considered less risky and have lower interest rates than long-term bonds. You can commonly trade bonds on secondary markets, meaning they provide more redemption flexibility than CDs. Some of the most common types of bonds are:

  • Treasury Bonds: These are issued by the U.S. government and are considered one of the safest investments. 
  • Municipal Bonds: These are issued by local governments to fund projects. Interest is generally tax-exempt.
  • Corporate Bonds: Corporations issue bonds to raise capital, paying investors periodic interest. These carry higher risks than government bonds if the company defaults. 
  • Bond Funds: These invest in a diversified basket of bonds from issuers like the government or corporations. Investing in a bond fund provides greater diversification. Bond funds have no set maturity date.

Callable CD FAQs

  • Are there risks with a callable CD?

    +

    The main risk is losing future interest if the bank terminates your callable CD early. If this happens, you'll still get your full principal deposit back plus interest earned to that point. However, you’ll miss out on the remaining interest payments you expected.

  • Is a callable CD FDIC-insured?

    +

    Yes, callable CDs issued by FDIC member banks are insured up to $250,000 per depositor, the same as traditional CDs. However, deposits exceeding this amount at the same financial institution are not covered.

  • Is a callable CD worth it?

    +

    Callable CDs can make sense for conservative investors who want insured fixed returns when they offer higher rates versus alternatives like traditional CDs or savings accounts. Just be aware of early termination risk and how that could impact your strategy.

About our author

Daniel Schoester
Daniel Schoester, Freelance Writer

Daniel is an expert on travel, finance, and SEO. He received an Honours BBA (Finance) from Wilfrid Laurier University, then started his career with WOWA. Here, he learned various SEO tactics that were instrumental in quadrupling monthly traffic to one million views. Now the founder of Croton Content, Daniel helps financial companies scale through evergreen content. Aside from Money Wise, notable clients include Forbes Advisor, WealthRocket, and Hardbacon. Daniel loves to travel when not working. Although based out of Lisbon, Portugal, some of his most adventurous destinations include Rio, Cairo, and Istanbul.

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