A certificate of deposit (CD) (a time deposit) that pays its holder a fixed interest rate over its lifespan, and at the same time allows the issuer (issuing bank) to call or redeem it for the full face value before maturity. In that sense it a vanilla CD embedded with a call option. This option helps the issuer refinance its CDs in issue by paying a call premium to the investors (holders). For example, a callable CD that was already issued at a rate of 3.8% can be redeemed by the issuer in an environment of decreasing rates and reissue it at 3.4% yield.
February 10, 2025
