callable CD

callable CD

A certificate of deposit that can be redeemed prior to the scheduled maturity. Many retail brokerage firms broker callable CDs issued by insured financial institutions. These CDs, often with long maturities, are traded in the secondary market and can fluctuate in value with changes in market rates of interest. Also called deposit note.
Case Study Although insured, callable certificates of deposit can spell trouble for unwary investors. The issuer can redeem a callable certificate of deposit prior to the scheduled maturity, but an investor holding the CD cannot redeem it prior to the scheduled maturity. The investor can only liquidate the CD through a sale in the secondary market, possibly for less than the principal or the investor's purchase price. Heads the issuer wins, tails the investor loses. The investor gains little if market interest rates fall, because the CD is likely to be redeemed early by the issuer. On the other hand, there is much to lose if market interest rates rise and the CD must be held for a long period of time. The added risk of the call feature causes issuers to pay higher interest rates on callable CDs than are paid on regular certificates of deposit. In late 2000 the New York Stock Exchange censured and fined a major brokerage firm for failing to supervise and control the sale of approximately $3 billion in callable CDs to approximately 161,000 customers. Some of the customers claimed their brokers did not inform them issuers could redeem the CDs prior to scheduled maturity. Other investors complained brokers did not warn that the CDs could not be cashed in early. The danger in owning these investments is particularly great for callable CDs with long maturities. Unlike regular certificates of deposit, which typically have maturities of six months to 5 years, callable CDs sometimes have maturities of 20 to 30 years.
References in periodicals archive ?
The Callable CD Checklist can be found at: http://www.
Investors who want their money before a callable CD matures risk a substantial loss -- as high as 30 percent -- regulators warn.
Providian is one of the first financial institutions to allow customers to open and fund a Callable CD completely online.
A Providian Callable CD account can be opened on-line at www.
s Broker-Dealer Services Division pioneered the Callable CD in 1994 as an innovative way to help banks raise deposits.
To reach the record level, LaSalle sold various callable CD types including 10-, 15- and 20-year CD's with fixed rate, step-rate, step-ups and zero coupon.
The Class includes anyone (including institutional investors) who bought a Callable CD at the full principal amount before March 9, 2008 from a broker (including brokers affiliated with a bank or financial institution) and either: (1) lost money when they sold their Callable CD prior to call or maturity for less that the purchase price; or (2) unsuccessfully attempted to sell or redeem the Callable CD for full principal amount prior to maturity.
The Nasdaq 100(R) MILC(2) is a six-year, callable CD with 100 percent capital protection and 100 percent participation in the Nasdaq 100 Index at maturity (note that the Final Index value is the average of closing values at each of the last four quarters).
A callable CD may be set, for example, on the London Interbank Offer Rate (LIBOR) plus 15 basis points on a quarterly, floating basis ("Looking for Funds," ABA Bankers News, April 3, 2001).
Peters applied the same business model to LaSalle's current list of taxable fixed-income products including: bullet and callable CDs (Multi-Step and Zero Coupon); Inflation- Protected CDs (CDIPs(SM)); Inflation-Floater CDs (IFCDs(SM)); and Market Index Linked CDs (MILCs(R)); Government Agency Debt; and Agency Collateralized Mortgage Obligations (CMOs).
Callable CDs are long-term, can be redeemed or "called" by the issuing company and the principal value fluctuates, unlike ordinary CDs.
These callable CDs will have an attractive rate because they allow the banks to offset loans and other longer-term assets.