What is a bullet CD?
A bullet certificate of deposit (CD) is a CD that can’t be called before it has matured. Also known as a noncallable CD, bullet CDs are among the most common types of CDs available to investors. They benefit investors who are planning for a big purchase in the future.
When an investor purchases a CD, she’s investing her money for a predetermined length of time in exchange for earning regular interest. Depending on the type of CD she purchased, her interest rate, or coupon, may vary: it could be a fixed-rate CD or a zero-coupon CD, in which the investor pays a lower amount for a CD that matures into its call price rather than accrue interest.
With a bullet, or noncallable CD, the bank cannot call, or redeem, the CD before its maturity date. That means the investor can expect regular interest payments for the entire time she owns the CD. This is in contrast to callable CDs, in which the financial institution can call the CD, paying the investor back her money at the call price plus a premium for her trouble.
For that reason, callable CDs often have a higher coupon than bullet CDs. A bullet CD will always last until its maturity, so the investor can always rely on its income payments. However, if the investor decides to cash in early, she’ll pay an early withdrawal fee.
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Bullet CD example
Rhonda has $5,000 and wants to invest in a low-risk product. She puts her money in a bullet CD that has a term of 24 months and pays an interest rate of 0.38 percent. When her CD matures, her $5,000 is now worth $5,038.14, assuming that the interest compounds each month.