What Is a Non-Callable CD and How Does It Work?

A Certificate of Deposit (CD) is a type of savings account that holds a fixed amount of money for a specified period, earning interest. CDs offer a predictable return on deposited funds. “Callable” and “non-callable” are key distinctions. This article explains what a non-callable CD is.

What is a Callable CD?

A callable CD provides the issuing bank with the option to redeem the CD before its stated maturity date. Banks typically exercise this right when interest rates in the broader market decline. If interest rates fall, the bank can call the existing CD, return the principal and any accrued interest to the investor, and then re-issue new CDs at a lower prevailing interest rate.

This feature allows the bank to manage its interest expenses. For the investor, a callable CD introduces reinvestment risk, meaning they might have to reinvest their funds at a lower interest rate if the CD is called early. Callable CDs often offer a slightly higher interest rate compared to non-callable CDs to compensate investors for this risk.

Defining Non-Callable CDs

A non-callable CD is a type of Certificate of Deposit that the issuing bank cannot redeem before its scheduled maturity date. This means that once an investor purchases a non-callable CD, the interest rate and the principal amount are fixed for the entire term, irrespective of how market interest rates change. The bank is obligated to pay the agreed-upon interest rate until the CD matures.

While the bank cannot initiate early redemption, investors typically face a penalty if they need to withdraw funds from a non-callable CD before its maturity. This early withdrawal penalty, which is usually disclosed when the account is opened, often involves forfeiting a portion of the interest earned or even some principal. The fixed nature of the interest rate and the inability of the bank to call the CD means the investor’s return is guaranteed for the full term.

Investor Considerations for Non-Callable CDs

Non-callable CDs are well-suited for investors who prioritize income predictability and stability. With a non-callable CD, investors know precisely what their return will be over the entire investment term, as the interest rate is locked in from the start. This feature makes financial planning more straightforward, particularly for those relying on fixed income.

These CDs offer protection against falling interest rates. If market rates decline after the CD is purchased, the investor continues to earn the higher, pre-determined rate, unlike with callable CDs. This transfers the risk of reinvesting at lower rates away from the investor. Non-callable CDs are often chosen by individuals seeking guaranteed returns for a specific future need or those who value the assurance of a consistent income stream.

Acquiring a Non-Callable CD

Non-callable CDs are available through various financial institutions, including traditional banks, credit unions, and brokerage firms. Investors can typically open a CD account by making an initial deposit, which often has a minimum requirement that can vary by institution and CD term. The process involves selecting a desired term length, which can range from a few months to several years, and agreeing to the fixed interest rate.

Funds deposited into non-callable CDs at FDIC-insured banks are protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank, for each ownership category. This insurance provides security for the principal and accrued interest in the event of a bank failure. Investors should review the specific terms, including any minimum deposit amounts and early withdrawal penalties, before committing funds.