CD Risks

Default Risk

There is generally less chance of default on CDs because CDs are insured. They are considered by many investors to be one of the safest investments available. FDIC Insurance covers up to $250,000 of principal & interest per customer per banking institution. To check the financial rating of a bank issuing a CD, you can go to the FDIC or Bauer Financial Web sites.

Market Risk

If you decide to liquidate your CD prior to maturity, you will be subject to whatever price the market will bear. This can be lower than your original investment depending primarily on interest rate movements since purchase date. CDs are not deemed appropriate securities for trading. The market for secondary CDs is not liquid and if you purchase a CD, it is best to do so with the intention of holding it to maturity.

Call Risk

Callable CDs will typically pay a higher interest rate compared to non-callable CDs with the same maturity. This is because the issuer retains the right to call back the CD at specified future dates. For this right, the issuer generally will pay the CD investor a higher rate. If a CD is called, the customer will get back their principal at 100 cents on the dollar and all interest accrued up to the call date.