The bank that issues the CD can "call" it away from you after the call-protection expires, but before the CD matures. For instance, if you buy a five-year CD with a six-month call protection period, it would be callable after the first six months.

What's happening here is the bank is shifting interest rate risk onto your shoulders. If they issue the CD at 5 percent and six months later rates drop and the bank is now paying 4 percent on five-year CDs, the bank can call, or take back, your CD and reissue it at 4 percent. 

Of course, you'll receive your full principal and interest earned to date. Usually, banks pay investors a premium for taking on the risk that the CD may be called. They may pay a quarter or half-percent more on a callable CD than they would on a CD without the call feature.

How do Callable Certificate of Deposit CDs Work?

Callable CDs are investments that investors make with financial institutions. These deposits are time deposits in which the issuer controls. The investor agrees to invest the money for a fixed amount of time with a specified interest rate for the return. The difference between traditional CDs and callable CDs is that callable CDs give the issuer a great deal of control over the investors’ money. The issuer may redeem callable CDs before the maturity date.

For example, consider a financial institution issued a CD in 2010 at an interest rate of 8%, maturing in 2020, and callable in 2015 at 103% of the face value. 5 years from issue, the financial institution has the right to call the CD, which financial institutions usually do if the interest rates are under 8%. The issuer usually must pay the investor a little above the face value, or par value, in order to call the CD. The difference is what financial institutions call the call premium. The amount decreases as a CD approaches the maturity date. For example, a financial institution may offer investors 103% of par value in the event the CD is called in 2015, but it may decrease the offer to 102% if the CD is called in 2018.

Advantages of Callable Certificate of Deposit CDs

Investors receive higher rates for a fixed amount of time.

The interest rates are higher than traditional CD rates.

The investors do not lose principle.

Investors receive par value once the investor calls the CDs.

Disadvantages of Callable Certificate of Deposit CD

There are early withdrawal penalties and longer terms on callable CDs. 

Investors may lose future interest.

Anyone can market callable CDs.

Callable CDs are more enticing to investors because they offer higher interest rates than traditional CDs do. There are many advantages and disadvantages to choosing callable CDs. 

Investors must make sure that they understand the difference between traditional and callable CDs.

If you are considering Retirement Planning, call for a free consultation today.