Lower yields
Because of the inherent safety and short-term nature of a CD investment, yields on CDs tend to be lower than other higher risk investments.
Interest rate fluctuation
Like all fixed income securities, CD valuations and secondary market prices are susceptible to fluctuations in interest rates. If interest rates rise, the market price of outstanding CDs will generally decline, creating a potential loss should you decide to sell them in the secondary market. Since changes in interest rates will have the most impact on CDs with longer maturities, shorter-term CDs are generally less impacted by interest rate movements.
Credit risk
Since CDs are debt instruments, there is credit risk associated with their purchase, although the insurance offered by the FDIC may help mitigate this risk. Customers are responsible for evaluating both the CDs and the creditworthiness of the underlying issuing institution.
Insolvency of the issuer
In the event the issuer approaches insolvency or becomes insolvent, the CD may be placed in regulatory conservatorship, with the FDIC typically appointed as the conservator. As with any deposits of a depository institution placed in conservatorship, the CDs of the issuer for which a conservator has been appointed may be paid off prior to maturity or transferred to another depository institution. If the CDs are transferred to another institution, the new institution may offer you a choice of retaining the CD at a lower interest rate or receiving payment.
Selling before maturity
CDs sold prior to maturity are subject to a mark-down and may be subject to a substantial gain or loss due to interest rate changes and other factors. In addition, the market value of a CD in the secondary market may be influenced by a number of factors including, but not necessarily limited to, interest rates, provisions such as call or step features, and the credit rating of the issuer. The secondary market for CDs may be limited. Fidelity currently makes a market in the CDs we make available, but may not do so in the future.
Call Risk
The issuer of a callable CD maintains the right to redeem the security on a set date prior to maturity and pay back the CD's owner either par (full) value or a percentage of par value. The call schedule lists the precise call dates of when an issuer may choose to pay back the CDs and the price at which they will do so.
Step-up Coupon
If your CD has a step-up coupon schedule, the interest rate of your CD may be higher or lower than prevailing market rates. Generally, a step-up CD pays a below-market interest rate for an initial defined period (often one year). After the expiration of that initial period, the coupon rate generally increases, and the CD will pay this interest rate until the next step, at which time it changes again, and so on through the maturity date. Holders bear the risk that the step-up coupon rate might be below future prevailing market interest rates. Because step-up CDs typically include call provisions, holders also bear the risks associated with callable bonds. In this regard, it is important to understand that if your CD is called, you will not benefit from the interest payment(s) of the later step(s). The initial rate on a step-up CD is not the yield to maturity. You receive the yield to maturity (YTM) only if you hold the CD until maturity (i.e. it is not sold or called). Please review the step-up schedule and call information found in the coupon and attribute columns of the search results page or in the CD Disclosure Document.
Survivor's option
In the event that the original investor is deceased or permanently incapacitated, most brokered CDs carry a survivor's option feature (also known as a "death put"), which allows the estate of a deceased investor to "put back" or redeem both principal and accrued interest of that instrument without penalty. CDs that carry a survivor's option can generally be redeemed for par value when the survivor's option is exercised. To confirm that your CD has a survivor's option, click the description of your holding and, on the Bond Details page, locate the row Survivor's Option. Alternatively, if you are considering investing in a New Issue CD, locate the Attributes column and confirm the acronym SO is listed within the Attributes section. Issuers may limit the permissible early withdrawal of CDs to the FDIC insurance limits (currently $250,000 for each insurable capacity) and/or may limit the amount being put back in a particular time period. The survivor's option must be invoked by the estate prior to any account re-registration or transfer. For further information on exercising the survivor's option, or to learn more about potential survivor's option limitations of a particular CD issuer, please call Inheritor Services at (800) 544-0003.
Coverage limits
FDIC insurance only covers the principal amount of the CD and any accrued interest. In some cases, CDs may be purchased on the secondary market at a price that reflects a premium to their principal value. This premium is ineligible for FDIC insurance. More generally, FDIC insurance limits apply to aggregate amounts on deposit, per account, at each covered institution. Investors should consider the extent to which other accounts, deposits or accrued interest may exceed applicable FDIC limits. For more information on the FDIC and its insurance coverage, visit www.fdic.gov.
