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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Do Callable CDs Make Sense in Today’s Rate Environment?

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A callable CD allows the bank to redeem the CD at the time of the call option or anytime thereafter. The time period from when the CD is opened to when the call option takes effect is known as the lock period. During the lock period, the bank can’t redeem the CD. Lock periods typically range from three months to two years. A traditional CD does not allow the bank to redeem the CD during the term.

Callable CDs are common for brokered CDs, but they are rare for direct CDs that are sold directly from banks and credit unions. Every now and then I come across an institution offering callable CDs.

Should savers ever consider a callable CD as an alternative to a traditional CD? Many readers have commented over the years that they consider a callable CD to be too favorable for the banks. As one reader commented, it’s a "heads the bank wins; tails I lose" proposition.

The main reason one would choose a callable CD over a traditional CD is for a higher interest rate. The higher the rate premium of the callable CD, the more attractive it becomes.

Another reason to choose a callable CD is the interest rate environment. Callable CDs are most risky when interest rates are falling. In a falling interest rate environment, the CDs will likely be called and the depositor will lose the high rate. However, if rates are flat or are rising, there will be less chance that the CD will be called. If the CD is called in a rising rate environment, the depositor should be able to find another CD with the same or higher rate.

In summary, if interest rates have bottomed, callable CDs can be good deals. Of course, no one knows for sure if interest rates have bottomed.

To be a good deal, a callable CD has to have a higher rate than non-callable CDs. Below are some examples of the rate premiums of callable CDs.

MidFirst Bank which has branches in Oklahoma and Arizona regularly offers competitive callable CDs directly from its branches. Below is a list of its 7-year callable CD rates and its 7-year non-callable CD rate as of 8/19/2013.

  • 2.50% APY 7-year Callable CD with a 6-month lock
  • 2.40% APY 7-year Callable CD with a 1-year lock
  • 2.30% APY 7-year Callable CD with a 2-year lock
  • 2.00% APY 7-year CD (not callable)

It’s very common for brokered CDs to be callable. In Fidelity’s brokered CD table, there’s a call-protection column that is used to identify callable CDs. If this column has a “no”, the CD is a callable CD with no call protection. If this column has a “yes”, the CD has call protection and is not callable. To determine the lock period, click on the bank’s name. This takes you to the CD details which includes the call protection field. If there is no call protection, there should be “view schedule” link. Click on this and you can see when the CD can be called.

Below are some examples of new-issue brokered CDs from Fidelity as of 8/19/2013. I’ve included the best rates for callable and non-callable CDs for several terms:

  • 3.15% 10-year callable CD (1-year lock) from MB Financial Bank
  • 3.05% 10-year non-callable CD from CIT Bank
  • 2.55% 7-year callable CD (6-month lock) from Compass Bank
  • 2.50% 7-year non-callable CD from GE Capital Bank

As you can see above, the rate premiums for callable brokered CDs are small. However, if you prefer buying a CD directly from a bank, a callable CD can allow you to get a significantly higher rate. At least, that’s the case with MidFirst Bank. The premiums may be smaller at other banks that offer callable CDs.

In today’s interest rate environment, how much of a rate premium would a callable CD need to offer for you to consider it a good deal?

  Tags: CD rates

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Comments
24 comments.
Comment #1 by Anonymous posted on
Anonymous
the secondary market needs to be considered as well.  if the cd is an older cd at a higher rate and is callable it is purchased back at the bank at par (100).  if you buy the cd at a premium and it is called it is purchased back at 100 so you may actually lose the money you invested.  On the flip side if the cd is sold at a discount (under 100) and it is called you would get more if it is called.

9
Comment #3 by Shorebreak posted on
Shorebreak
Good post Ken. Many people are unaware of these "callable CDs".

"Callable CDs are most risky when interest rates are falling. In a falling interest rate environment, the CDs will likely be called and the depositor will lose the high rate."

Rates don't have to fall that much for some institutions to "call" those certificates. California Thrift and Loan had some very nice yields on CDs in the early-mid 1990s. Due to my own young inexperience and failure to read all the fine print, I was not aware these were "callable" or even knew what that term meant. Lo and behold, one day the notice that California Thrift was calling my two CDs arrived in the mail.

Multiple lessons learned due to that exposure: Education about deposit products is imperative, read the fine print and know your options.

Note: Santa Barbara based California Thrift and Loan evidently shortly went under after that. That may have had something to do with the CDs being called.

January 23, 1997 | Times Staff and Wire Reports Bay View Capital Corp. said it completed most of a previously announced restructuring of California Thrift & Loan, which it bought in June for about $62 million.

7
Comment #5 by Anonymous posted on
Anonymous
I had the California Thrift 6% CDs and also did not know they were callable until they called them!  They gave me an extra few months of FREE interest when they called them, paying up to the end of the quarter. 

I think similar CD rates had fallen at least 2% lower when they called them, but that was not a requirement.  They sneakedly has a provision that they could call them anytime.

This is the place I always think of when I see this topic discussed.

8
Comment #6 by Anonymous posted on
Anonymous
Most callable CDs are not FDIC insured, because they are in pools of $2,4,5,10 or more millions each. You are a just a part owner of that CD and in case of failure not all of your money may be recovered.  Secondary market CDs are issued by banks, corporations, financial, mortgage and other entities that may have poor credit ratings.
I stay away from such instruments, it is not worth the risk, especially if the broker who took your money is not on solid ground. Your money floats at least a month before they are placed in the pool and after they have matured.

10
Comment #8 by Anonymous posted on
Anonymous
If I have to pay a early withdrawl penalty, so should the banks.

11
Comment #9 by lou posted on
lou
Shorebreak and #5, do you guys live in Santa Barbara? I am from the area and do remember this S&L in the early 90's. I wasn't buying CDs back then so don't remember these callable CDs. Bought 5.25% 5-year CDs from Santa Barbara Bank&Trust in late 2008 which will mature at year-end. The bank was recently acquired by Union Bank. Unfortunately, their CD yields are dismal. Lately I can't find any bank or credit unions with decent yields in the area. Do you guys know any?

1
Comment #10 by Anonymous posted on
Anonymous
I am #5 poster and I am not from Santa Barbara area.  I have been buying CDs nationally since 1982 when Prez Reagan  got the laws changed that allowed banks, S&Ls/Thrifts to compete nationally at any interest rate they chose. Before the internet, there used to be many print newsletters that specialized in finding good nationally available CD rates.  Now Ken's site and others like this does this for us!

5
Comment #11 by Shorebreak posted on
Shorebreak
Re: lou @#9,Monday, August 19, 2013 - 6:39 PM

"...do you guys live in Santa Barbara?"

Anonymous - #10, @ Monday, August 19, 2013 - 7:02 PM had it right for the most part:

"Before the internet, there used to be many print newsletters that specialized in finding good nationally available CD rates."

lou, I couldn't afford to live in that wonderful paradise Santa Barbara. At the time I was residing in Silicon Valley, to your North and came across an ad for CDs from California Thrift in the San Jose Mercury News. They had an office in Santa Clara and that's where I opened the accounts, and closed them when they were called.

2
Comment #12 by lou posted on
lou
Shorebreak and #10, thanks for responding. Shorebreak, I don't think Silicon Valley is any less expensive than Santa Barbara. These days with all those new Facebook millionaires, I am sure the housing prices are probably climbing in order to meet the demand. Santa Barbara is great place to live; however, I wish I could find a bank or credit union nearby with good rates. :) Oh well, it really doesn't matter, since nowadays you can shop for CDs or savings/checking accounts anywhere in the country.

3
Comment #13 by Priscilla (anonymous) posted on
Priscilla
Israeli bonds (10 yr.) are now over 4.00%, interest payable twice a year.  I guess this indicates rising rates.  Anyone have experience with these?

4
Comment #14 by Anonymous posted on
Anonymous
I had Israeli bonds, but lost 12% on them when the Shekel went down, never again a foreign bond for me.

7
Comment #15 by QuickSilver posted on
QuickSilver
When you buy a callable bond, you are buying the bond and selling a call option against that bond.  It is very difficult for the average investor to properly value that call option to insure fair value.  Even if you have acces to a good model, you have to know the proper values of all the variables that go into the formula to get meaningful results.  For example, I have no clue what the proper volatility value would be, but without it any results are not very helpful.

For those considering callable CD's, you might want to look at callable agency bonds.  FHLB, FFCB,FNMA, and FHLMC all issue callable paper.  FHLB and FFCB are exempt from state income taxes.  Yesterday, FHLB issued a 10 year bond that is callable after 3 months with a coupon of 3.75%.  That bond will at least give you some basis to compare to callable CD's.  You can google "FHLB OF" and click "debt securities" to see what they are issuing.  I would also compare all CDs to current treasury yields.  Go to CNBC or Bloomberg websites to find current treasury yields.  Treasuries are extremely safe and liquid and exempt from state income taxes.  Be careful not to let your broker rip your face off on the markup.  Ask the broker what the yield to maturity is at the quoted price and make sure that yield is pretty close to whatever source for current yields you choose.

IMO, I would be biased against callable CDs.  They are difficult to properly value, not very liquid, and get taken from you if rates move lower. 

4
Comment #16 by ChrisCD posted on
ChrisCD
I'm surprised nobody replied to #6.  Just because a brokered CD that you buy at $100K is part of a $1MM or $100MM CD does not make it any less FDIC insured then a direct CD that you buy from your local bank.  Brokered CDs are FDIC insured via Pass-Through insurance (assuming the underlying bank is FDIC insured of course)

I believe I have actually posted this info before, but here you go again:

"The FDIC's insurance regulations include the following rule: "Funds owned by a principal or principals and deposited into one or more deposit accounts in the name of an agent, custodian or nominee, shall be insured to the same extent as if deposited in the name of the principal(s)." 12 C.F.R. § 330.7(a). In other words, the insurance coverage "passes through" the agent or custodian to the principal. "Pass-through" coverage generally is not available, however, unless the agency or custodial relationship "is expressly disclosed, by way of specific references, in the deposit account records' . . . of the insured depository institution." 12 C.F.R. § 330.5(b)(1)."

Most trusted brokerages only deal with FDIC insured CDs.  If you ever question whether an offering is FDIC insured or not, ask your broker for the FDIC# of the underlying bank and look it up.

7
Comment #17 by Anonymous posted on
Anonymous
For the most part, the small difference between the rate of a callable versus a noncallable cd never seemed to be attractive enough for the added risk of the cd being called during a lower interest rate environment.  In most cases I have usually found a noncallable cd rate that equalled or exceeded the rate of a callable cd anyway.

What is good for the goose should be good for the gander.   In other words, I would like for a bank to offer a callable cd that I had the right to call (fees not included).  Then when cd rates rise, I would have the option to call it and reinvest in a higher rate cd.  The banks would never go for this and this is why I do not get excited about their low ball rate callable cd's. 

2
Comment #18 by lou posted on
lou
Thanks CDChris for responding to #6. His post didn't make any sense to me, either.

#13, I thought Israeli bonds bought in the US were US dollar denominated. You shouldn't have lost any money because of exchange rates.

2
Comment #20 by Anonymous posted on
Anonymous
Callable bonds or CDs and bonds make sense for issuers.  Bonds can be closed if the issuer can get a lower rate than they are paying at the call date.  CD's can be called if rates go up. 

3
Comment #21 by Harry Sit (anonymous) posted on
Harry Sit
I would model a callable CD bought directly from a bank (not brokered) like a reward checking account that you keep at the maximum at all times. The bank will call it when rates go down. That's similar to how a bank lowers the rate on a reward checking account. You just move on. Until the CD is called, you are earning similar/higher yield than a RCA, with a higher cap, without the monthly usage requirements.

3
Comment #22 by ChrisCD posted on
ChrisCD
@Harry - I think a big difference however is the penalty to close the CD.  A checking account has no such penalty. Most direct Callable CDs I have seen have a penalty that quite high.  For this offer, I don't see that the penalty was mentioned.

cd :O)

 

2
Comment #23 by Anonymous posted on
Anonymous
@ChrisCD:

I don’t know how callable CDs work nowadays but in 2001 I opened a 5-year 6.50% callable CD directly with Provident Bank (callable after 1 year). Soon after passing the one year mark I received a letter from the bank notifying me that they were exercising the call option and that they were closing my account. I received a check in the mail shortly after for the balance in the account. There were no penalties involved whatsoever.

2
Comment #24 by Anonymous posted on
Anonymous
Israeli bonds are US dollar denominated.  Plus, if you hold them to maturity, you don't lose value.

1
Comment #25 by Anonymous posted on
Anonymous
#24  If Israeli bonds are so great then why aren't more people buying them?  (10 year are paying well into  4% ).  And who guarantees them?

1
Comment #26 by ChrisCD posted on
ChrisCD
@23 - My reference was not to a penalty if the bank calls the CD, it was the penalty if you close the CD early.  A checking account has no such penalty and is very liquid.  Callable CDs typically are longer term and although the bank can give you your $ back early (the call), you can not get the funds back early without paying what is quite often a substantial penalty.

1