Why are the interest rates and APYs so much higher than traditional fixed rate Certificates of Deposit?
The investor has in effect, sold the right to call the CD prior to maturity to the issuer. This call feature has considerable value. Thus, the financial institution pays the investor a higher interest rate than he would receive purchasing a non-callable CD in exchange for receiving this right to call the issue. What causes a Callable CD to be called? A callable CD may be called when the issuer determines that it is cheaper to issue a new security than it is to pay the interest payments on the outstanding security. There is no simple way to predict precisely when a call will occur. However, when interest rates decline, the probability of the investment being called increases significantly. Is all or part of the principal called? As a general rule, callable CDs are called only when there is an economic reason to do so. As a result the issue will be called in its entirety or not at all. Some issues have a provision allowing for a partial call of the issue outstanding, but there is no grea
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- Why are the interest rates and APYs so much higher than traditional fixed rate Certificates of Deposit?
