Risk Considerations

Liquidity Considerations

As with other fixed income instruments, secondary market prices for CDs are subject to market conditions. CDs redeemed prior to maturity are subject to credit market fluctuations, and may be worth more or less than the initial investment. Only CDs held to maturity or call are assured the full return of principal. Subject to those risks, callable CD holders receive the return of original principal along with earned interest when the CDs are called. In the case of Structured CDs, interest paid in the event of call follows a predetermined schedule which is disclosed at the time of issuance.

Call Risk

Some CDs allow the bank issuer to redeem or "call" the CD at its sole discretion. These CDs are termed "Callable CDs." On pre-determined dates, the bank can choose to give you your money back (including accrued interest) and cancel the CD. A call provision does not give you the right to redeem the CD. Call features are typically incorporated in CDs with longer terms and the call feature may be combined with other features, such as a step rate.

Typically, the bank will call your CD when interest rates have declined below the rate on your CD because the bank can attract deposits at a lower rate. If your CD is called you may not be able to reinvest your money at the same rate as the CD that was called. This risk is termed "reinvestment risk." If it is not called, investors should be prepared to hold the CD until maturity.

Callable CDs are sometimes referred to in terms of their maturity and the period during which they cannot be called. For example, "15 year, non-call one" means the CD matures in 15 years, but may be called at pre-determined dates or, in some cases, at any time after the first year.

Banks and deposit brokers must inform you that a CD is callable. However, the APY on a callable CD is not required to reflect the call feature. This will be significant if the CD has step rates because the CD could be called before the CD steps to a more favorable rate. In that case you will receive less than the advertised APY. You should be sure you understand both the APY you will receive on the CD if it is held to maturity and the APY you will receive on the CD if it is called.

Investors should purchase a Callable CD only if you understand that the timing of the return of principal may be uncertain due to the call feature and may, in fact, be at the maturity date. Callable CDs may be paid off prior to the maturity as a result of a call by the issuer and, in certain cases, the total return may be less than the yield which the CD would have earned had it been held to maturity.

If a Callable CD is sold prior to maturity, the value of the CD will be subject to full market considerations, including, but not limited to, interest rate changes, which could result in a significant loss from the initial investment amount. This is true of all Brokered CDs. However, since Callable CDs tend to have longer maturities, their price sensitivity to interest rate changes is greater.

Market Linked CDs

The creditworthiness of an issuer must be considered (if FDIC limits are exceeded). Investors risk principal in the event they sell the CDs prior to maturity (liquidity risk). There may not be a liquid secondary market for the CD or the value of the investment may be worth less than the principal amount prior to maturity.

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