Should I buy a callable brokered CD for the higher interest rate?

[Digital Nomad]

At age 61 it seems illogical to have most of my money in the stock market and I got burned by Bond Funds- sold all earlier in the year- so I have lots of money in Money Market Funds and higher yield savings accounts earning 2-3%.

Now I see CALLABLE Brokered CDs on the Ameritrade Website for as much as 5%. Callable CDs pay much more interest than non-callable options. The trouble is if interest rates fall they will be called and I won't have the money earning 5% interest anymore.

But if they are not called I win by having a guaranteed 5% interest for years going forward. And even if they are called sometime in the future I had earned a higher level of return from today to the call date than any other guaranteed income option.

What do you think of my logic and would you buy a callable CD if you wanted some of your money outside the stock market?

 

[COcheesehead]

I ladder my fixed income so it’s a mix of durations, callable, non callable, different quality levels, etc. I can’t guess the market so I try and maximize my income from what is known now. If an instrument is called, I have never had an issue finding something else to put it in.

 

[Earl E Retyre]

At age 61 it seems illogical to have most of my money in the stock market and I got burned by Bond Funds- sold all earlier in the year- so I have lots of money in Money Market Funds and higher yield savings accounts earning 2-3%.

Now I see CALLABLE Brokered CDs on the Ameritrade Website for as much as 5%. Callable CDs pay much more interest than non-callable options. The trouble is if interest rates fall they will be called and I won't have the money earning 5% interest anymore.

But if they are not called I win by having a guaranteed 5% interest for years going forward. And even if they are called sometime in the future I had earned a higher level of return from today to the call date than any other guaranteed income option.

What do you think of my logic and would you buy a callable CD if you wanted some of your money outside the stock market?

You will probably get opinions on both sides of the fence ... but in my opinion, I would not buy a callable CD.

For example, I see noncallable 4.5% 5 yr CDs and callable 5% 5 yr CDs. If by the start of year 3, interest rates drop back down to 3% then the callable ones will get called. Assuming you reinvest the money at the 3% then you made the bad decision of the two options.

If I am doing the math correctly, at the end of 5 years the callable CDs (earning 5% year 1, 5% year 2, 3% year 3, 3% year 4, 3% year 5) would result in $20,473 in interest. And the noncallable CDs (earning 4.5% for all 5 years) would yield $24,618.

If interest rates continue to stay at 5% (or higher) for all 5 years then the callable ones would obviously be better since they would not get called. So, it is a guess as to whether you believe interest rates will continue to stay at 5% or better for the next few years. No one knows what the interest rates will do. I am assuming that the rates will come back down as quickly as they went up.

Having said all that, I believe interest rates have not quite peaked and that after the next rate hike(s), they will continue to rise a bit more. I am nibbling as rates go up and will substantially lock in 5 year non-callable CDs as rates reach 5% and higher.

 

[Car-Guy]

Personally I have never bought any callable CD's... However, if I could get a 5% callable that matured in 1 year or less I'd probably do it... But if I were looking for maturities in the 2 to 5 year range I'll stick with non-callable which I can get for 4.5+ now. But that's me.

 

[11522914]

Personally I have never bought any callable CD's... However, if I could get a 5% callable that matured in 1 year or less I'd probably do it... But if I were looking for maturities in the 2 to 5 year range I'll stick with non-callable which I can get for 4.5+ now. But that's me.

I prefer non-callable too and willing to take the lower basis hit to lock the rate in.

 

[4legsgood]

I avoid callable CDs for maybe the emotional reason of knowing they'll only call it if it's in their best interest, which won't be mine. I have bought long term bonds with call date way out in the future since I know I'll at least get the interest rate I want for a long time.

 

[jazz4cash]

Looking at Fidelity's offerings right now, there is about .20% difference between a callable vs non-callable 5 yr CD. That seems like a pretty low cost to ensure the CD is not called away from you. If the difference was .5% or higher I might be tempted to take the callable CD.

 

[Chuckanut]

It's risk versus reward.

I would love to see a study that looks at what is the best interest rate difference between callable and non-callable to maximize earnings.

 

[Sunset]

OP - since you have a bunch of cash available, do both.
Personally I'm buying mostly treasuries , but I've bought a couple of CD's , one is paying 6% , maybe it will be called in about 2 years, but I can't buy a 2yr anything paying 6% that is 100% safe. If I get "stuck" with it for for the full 5 years at 6%, I'll cry all the way to the bank.

(there are some risky bonds like credit suisse that are paying high rates).

Rates will have to fall quite a bit for things to be called, as nobody does it for a 1% change, and in a declining rate environment, folks will be worried about recession, so borrowing for companies will not fall as much due to risk of less business.