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Certificates of Deposit: Call Period Versus the Maturity Date

A common type of certificate of deposit or CD nowadays is the callable CD. As opposed to a traditional CD, a callable CD allows an issuing financial institution to redeem it or "call it back" before the end of its term and regardless of whether or not an investor wants to hold on to it. This ability to be redeemed by banks was included in many CDs, especially in long-term CDs that pay interest to depositors at higher rates, as a contingency measure in anticipation of decreases in market interest rates. Banks in general will find it increasingly difficult to pay CD holders at high interest rates if low rates will continue to affect their profitability in their own investments. Through the use of callable CDs, banks will be able to enjoy their profitability, however reduced it may be, and at the same time make sure their depositors will get their money back.

A call period is a feature unique to callable CDs. This is the period of time during which a callable CD may be redeemed by its issuing bank. The owner of a CD has to be informed by the bank if and when a security is to be redeemed though the actual redemption may be executed even without the CD holder's consent. A CD's call period is not the same as its maturity date although both time frames entail a depositor's relinquishing his or her holdings in exchange for the money that was invested plus an incentive in one form or another.

Every fixed-income security has a maturity date but call periods are exclusive to callable CDs. A maturity date is the date by which the principal amount of a CD or any other fixed-income security has been paid back to its owner along with the total interest that was earned by the same security-minus bank charges, of course. A call period, on the other hand, could be at any time prior to a CD's maturity date wherein the security is to be returned to the issuing bank in exchange for the principal and a separate premium which is often whatever interest has already accumulated by then. A CD ceases to exist upon its maturity date but if it has simply been redeemed by the bank, it continues to exist as a whole security, ready to be sold once again to investors albeit with a reduced interest rate.

The call period of a callable CD may occur at various times throughout the duration of the security though it is often clearly indicated under the terms of the certificate itself as provided by the issuing bank. A call period may be early on in the duration of the CD, usually the first year in the case of CDs whose durations are two years or more. A call period may also be in effect only after a particular date but still before the maturity date. For other CDs, the call period is "revolving" or set at various intervals throughout the duration.

In any case and in accordance with banking standards, a call period specified under the terms of a CD cannot cover the entire duration of the security. Moreover, issuing banks are allowed only limited windows of opportunity during which they can exercise their right to buy CDs back from investors, whether or not market interest rates have fallen below what they view as acceptable levels. While call periods protect banks from the effects of reduced profitability should market rates go down, the limited windows can protect investors from being prematurely deprived of their relatively high-interest holdings even as the situation goes bad for everyone else.