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Author: foobar73 Big red star, 1000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35344  
Subject: Re: scottrade CD offer - callable ? Date: 7/18/2003 6:28 PM
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I received this from SCOTTRADE regarding a callable CD - has anyone heard of this -

Sounds that if the rate is below market - your CD will not be called, but if the predetermined rate is above market, say goodbye to the CD.


Callable fixed income is nothing new. Certainly callable bonds are not uncommon, and they do behave just as you indicate: if interest rates should fall, the issuer will tend to call the bonds, in order to avoid having to pay the higher rates on the existing bonds.

You should keep the call provisions in mind when buying these; make sure you know what your effective yield will be in the event that the bond is not allowed to run to maturity, and compare that with ordinary bonds/CDs with maturities similar to the call date. You'll also need to factor in the chance that the CDs will actually be called; this, of course, relies on your own judgement and expectations of how interest rates will move.
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