What Is a Call Date on a CD and How Does It Work?
Understand what a call date on a CD means for your savings. Learn how callable Certificates of Deposit work and how to identify them.
A Certificate of Deposit (CD) is a type of savings vehicle offered by banks and credit unions that provides a fixed interest rate for a predetermined period. It requires depositors to commit funds for a specific term, ranging from a few months to several years, in exchange for typically higher interest earnings than a standard savings account. While most CDs guarantee this fixed return until maturity, some include a “call date” feature, which allows the issuing institution to end the CD term early.
Understanding Callable Certificates of Deposit
A callable Certificate of Deposit gives the issuing financial institution the option to redeem the CD before its stated maturity date. This redemption can occur on a specific “call date” or periodically thereafter, often every six months, after an initial non-call period. The primary motivation for banks and credit unions to issue callable CDs is to manage their interest rate risk.
If prevailing interest rates decline after a CD is issued, the institution can “call” the CD, ending their obligation to pay the higher, agreed-upon interest rate. This allows them to re-issue new CDs at the lower current market rates, reducing their cost of borrowing. The call feature primarily benefits the issuer by providing flexibility in a fluctuating interest rate environment.
What Happens When a CD is Called
When a callable CD is redeemed by the issuing institution, the investor receives their original principal investment back, along with any interest accrued up to the call date. However, the primary financial implication for the investor is the loss of all expected future interest payments for the remaining term.
The institution exercises its call option when interest rates have fallen, forcing the investor to reinvest their funds at a lower market rate. This scenario, known as reinvestment risk, can make it challenging for the investor to find a new investment vehicle that offers a comparable yield to their original CD. For example, a five-year CD called after two years would mean the investor misses out on three years of the higher, locked-in interest rate.
How to Identify a Callable CD
Identifying whether a Certificate of Deposit is callable is important for investors before committing funds. Financial institutions are required to disclose the callable nature of a CD. This information is found within the official offer documents, such as the CD agreement or the terms and conditions provided at the time of purchase. It is important to read all fine print carefully to understand any embedded call features.
Financial institutions state if a CD is callable in their product descriptions, marketing materials, or online listings. Prospective investors should also directly ask a bank representative or financial advisor about the presence of a call feature before opening an account. Callable CDs sometimes offer a slightly higher interest rate compared to non-callable CDs of similar terms. This higher yield can serve as a potential indicator that the CD carries a call provision, as it compensates the investor for the risk of early redemption.