Question about callable CDs

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Bennie
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Question about callable CDs

Post by Bennie »

Given this data, for example

"10 - 12 months Change

Select a bank from the list below:

Jpmorgan Chase Bank 5.500% Matures 5/20/2025
Payment frequency: Interest at maturity Settles 5/20/2024
Callable 11/24@100"

I am not sure how the callable CD works or why some people say not to use them.

Does 11/24 mean it goes for 4 months to 11/20/2024 or can it be called 11/01/2024?

If I put 10K into this CD, for example, the worst that can happen is that they pay me the 10K back in November with (5.5% of 10K)*4/12 = 183.33 dollars in interest added to the nest egg, right?

Do people not like this because they have to watch the CD to see if it is called?

If it is not called, the 5.5% interest would keep accumulating until 5/20/2025, right?

Anything I got wrong here or anything else I should know?

Thank you so much for any help and education on this! :beer
alex_686
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Re: Question about callable CDs

Post by alex_686 »

I would re-read closely. The bank can set whatever callable date they would like. Normally it would be at nice even intervals such as 6 months. So 5/20/2024 to 11/20/2024. So a 11/01/2024 date is a bit odd. I would lay money that the callable date is 11/20, not 11/01. However, this does suggest a bit deeper read.

On the plus side they have higher rates. On the downside if rates fall the CD will be called and you will then need to reinvest at a lower rate. Of course, if rates rise you will miss out on those because you are locked into a CD. However since it is callable it would have a rate than a non-callable one so you come out ahead.

Why don't people like callable CDs? Well, most people like certainty. I personally think certainty is overrated. On the other hand, I have a bond calculator at work that can figure out how much a call option is worth. So....
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Bennie
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Re: Question about callable CDs

Post by Bennie »

alex_686 wrote: Tue May 14, 2024 10:02 pm I would re-read closely. The bank can set whatever callable date they would like. Normally it would be at nice even intervals such as 6 months. So 5/20/2024 to 11/20/2024. So a 11/01/2024 date is a bit odd. I would lay money that the callable date is 11/20, not 11/01. However, this does suggest a bit deeper read.

On the plus side they have higher rates. On the downside if rates fall the CD will be called and you will then need to reinvest at a lower rate. Of course, if rates rise you will miss out on those because you are locked into a CD. However since it is callable it would have a rate than a non-callable one so you come out ahead.

Why don't people like callable CDs? Well, most people like certainty. I personally think certainty is overrated. On the other hand, I have a bond calculator at work that can figure out how much a call option is worth. So....
Thanks, Alex!

Ugh - "...a bond calculator at work that can figure out how much a call option is worth." That sounds intriguing! :D
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GarfieldBogle
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Re: Question about callable CDs

Post by GarfieldBogle »

Yes, if the CD is called early you would get the principal + accrued interest back to the call date. It just gives the bank the option to refinance if rates are lower at the call date. If the CD reaches maturity you would get the full interest along with your principal back.

Most people don't like callable CD's because if the CD is called early, it means current interest rates are lower.
Last edited by GarfieldBogle on Wed May 15, 2024 2:05 pm, edited 1 time in total.
upwind
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Joined: Mon Mar 25, 2024 7:27 pm

Re: Question about callable CDs

Post by upwind »

Bennie wrote: Tue May 14, 2024 9:47 pm Given this data, for example

"10 - 12 months Change

Select a bank from the list below:

Jpmorgan Chase Bank 5.500% Matures 5/20/2025
Payment frequency: Interest at maturity Settles 5/20/2024
Callable 11/24@100"

I am not sure how the callable CD works or why some people say not to use them.

Does 11/24 mean it goes for 4 months to 11/20/2024 or can it be called 11/01/2024?

If I put 10K into this CD, for example, the worst that can happen is that they pay me the 10K back in November with (5.5% of 10K)*4/12 = 183.33 dollars in interest added to the nest egg, right?

Do people not like this because they have to watch the CD to see if it is called?

If it is not called, the 5.5% interest would keep accumulating until 5/20/2025, right?

Anything I got wrong here or anything else I should know?

Thank you so much for any help and education on this! :beer
Look at the details for the offering. It should list the call schedule or indicate if continuously callable and other details. What you are looking at above I believe is the first call date (or possibly only call date depending on call schedule but you need to look at cd issue details for full picture). I assume but never have confirmed @100 means they call it all if they call (or can call up to 100% is the other possible interpretation; I am not sure). Full maturity is the date following Matures if it isn’t called before.

For what it is worth, which is nothing, I have had a number of Chase callable CDs over last couple years and none called yet. Holding a 5.8 and 5.7. Had a 5.7 recently mature.
“Investing is the intersection of economics and psychology.” - Seth Klarman
zeeke42
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Joined: Sat Feb 14, 2015 4:13 pm

Re: Question about callable CDs

Post by zeeke42 »

GarfieldBogle wrote: Wed May 15, 2024 12:24 pm Most people don't like callable CD's because if the CD is called early, it means current interest rates are lower.
Yeah, to me the whole point of CDs is I get to lock in current interest rates. If it can be called in a few months, I'm just going to leave it in a money market.
Rocky Mtn Man
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Re: Question about callable CDs

Post by Rocky Mtn Man »

I've purchased multiple callable CDs, never been called, even when rates dropped. <shrug>
sport
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Location: Cleveland, OH

Re: Question about callable CDs

Post by sport »

Another way of looking at callable CDs is this:
If rates go down, the CD is called. You lose.
If rates go up, the CD is not called. The bank wins.
So, it is all to the advantage of the bank. However, if they pay a higher interest rate than a non-callable CD of the same maturity, then you get to decide if that is enough to compensate you for the disadvantageous arrangement.
bd7
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Re: Question about callable CDs

Post by bd7 »

sport wrote: Wed May 15, 2024 2:04 pm So, it is all to the advantage of the bank. However, if they pay a higher interest rate than a non-callable CD of the same maturity, then you get to decide if that is enough to compensate you for the disadvantageous arrangement.
Exactly. The same applies to callable Federal agency bonds like Federal Home Loan Banks and Federal Farm Credit Bank where the terms are all in their favor but I'm getting 6.15%. Add in risk-free and no CA income tax and it starts to look better than any fixed CD or short-term MM.
Ccthealias
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Re: Question about callable CDs

Post by Ccthealias »

bd7 wrote: Wed May 15, 2024 2:46 pm
sport wrote: Wed May 15, 2024 2:04 pm So, it is all to the advantage of the bank. However, if they pay a higher interest rate than a non-callable CD of the same maturity, then you get to decide if that is enough to compensate you for the disadvantageous arrangement.
Exactly. The same applies to callable Federal agency bonds like Federal Home Loan Banks and Federal Farm Credit Bank where the terms are all in their favor but I'm getting 6.15%. Add in risk-free and no CA income tax and it starts to look better than any fixed CD or short-term MM.
Where do you go to invest in federal agency bonds? Are those backed by the government?
alex_686
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Re: Question about callable CDs

Post by alex_686 »

Ccthealias wrote: Wed May 15, 2024 4:07 pmlAre those backed by the government?
Technically no. Mostly.

De Facto, yeah, kind of. The Government bailed out the debt holders but not the equity holders when they had serious issues.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
quattro73
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Re: Question about callable CDs

Post by quattro73 »

sport wrote: Wed May 15, 2024 2:04 pm If rates go up, the CD is not called. The bank wins.
This is the same as for any non-callable CD or Bond.
sport
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Location: Cleveland, OH

Re: Question about callable CDs

Post by sport »

quattro73 wrote: Wed May 15, 2024 9:44 pm
sport wrote: Wed May 15, 2024 2:04 pm If rates go up, the CD is not called. The bank wins.
This is the same as for any non-callable CD or Bond.
Of course, but conversely, if rates go down, you win for a non-callable CD.
bd7
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Joined: Thu Jul 28, 2022 4:31 pm

Re: Question about callable CDs

Post by bd7 »

Ccthealias wrote: Wed May 15, 2024 4:07 pm Where do you go to invest in federal agency bonds? Are those backed by the government?
Any brokerage--Fidelity, etc. The credit risk is nil, the details of why are complicated and different for each agency so I won't say they're explicitly backed by the US government. I'm specifically referring only to the two agencies I referenced, FFCB and FHLB.
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