Purchasing Certificates of Deposit
Apart from the local banks, there are many brokerage firms and independent salespeople who offer various kinds of CDs. These deposits may also be purchased from various thrift institutions and credit unions. The deposit brokers can negotiate a higher rate of interest for a CD by bringing a certain amount of deposits to the institution. It is true that there were times when most CDs paid a fixed interest rate until they reached maturity. Now, however, investors have to choose from variable rate CDs, long-term CDs and CDs with other special features.
What are ‘call’ features?
A CD with ‘callable’ feature can be expected to be closed by the issuing bank or credit union before the term ends. This can happen if interest rates fall and the issuing bank decides to call a CD. Banks offer callable CDs to shift interest-rate risk to the depositor. Since the risk is shifted to the depositor, callable CDs pay a premium interest rate. Banks and credit unions manage their interest rate risk by selling callable CDs. On the call date, the banks determine if it is cheaper to replace the investment or leave it outstanding.
Are there ways to avoid such a situation?
Of course! And the only one way is to be alert. The importance of taking precautions and understanding the minute details at the time of investing in a CD cannot be stressed enough. Make sure you fully understand all of its terms before you consider purchasing a CD from your bank or brokerage firm. Go through the disclosure statements carefully. Don’t miss the fine print. And, don’t fall into the trap of high yields. Think carefully before you invest.