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Do callable CDs mean higher CD rates?

By Sheyna Steiner · Bankrate.com
Wednesday, June 23, 2010
Posted: 9 am ET

CD rates just hit a new low. The average one-year CD yield is now a record low of 0.69 percent APY, a dubious achievement to be sure. Bankrate began tracking CD rates in October of 1983 and it has never been lower.

In these dark days of ultralow returns, you might run across CD rates that are a little bit higher than average but also sporting an extra feature: a call option.

A call feature allows bankers to price CD rates higher than the going rates but if rates should fall for some reason, they can call it back at a certain time.

If rates rise, they will be less likely to call the CD, after all they're already borrowing money from you at a discounted rate so, just like with a regular CD you'll be stuck at that rate until the maturity.

In the current environment it would be difficult for CD rates to go even lower but it's happening every week in Bankrate's survey of interest rates across the country.

It can be a bit tricky discerning the call date from the maturity.

It will often be worded in a way that can lead investors to believe the maturity is actually the call protection period. For instance a three-year callable CD means that the CD can be called in after three years and pay back the investor's money. The actual maturity could be many more years.

According to Bondclass.com, callable CDs are generally offered in maturities between three and 20 years.  And most callable CDs do end up being called.

To be sure that the investment is worth the interest rate risk, investors should calculate not only the yield to maturity but also the yield to call.

Use this Bankrate calculator to figure out your CD earnings.

Would you buy a callable CD for higher CD rates?

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