Higher-than-market rates have been increasingly used to lure consumers into buying certificates of deposit that come with unusual strings attached.
Many savers who buy one-year callable CDs apparently think "one year" means they can redeem the CD after a year. In fact, such CDs can't be redeemed until maturity, which could be 20 or more years down the road.
The trick is that it is the issuing institution that can redeem, or call, the CD at any time after the first year. If rates have dropped, the bank will exercise that right and give savers back their cash to reinvest at lower yields.
But if rates have risen, the bank will keep the CD in force at what then amounts to a below-market rate.
If the saver wants to go for a higher yield, he or she can sell the CD back to the broker, but perhaps at far less than was originally invested.
In fact, buying a CD from a broker is similar to purchasing a bond. You are guaranteed the return of your principal at maturity. But if you want your money before then, the value of your investment depends on market interest rates. If rates have risen, the value of your CD may have plummeted.
Susan Ferris Wyderko, director of the SEC's Office of Investor Education and Assistance, says, "We are seeing people who redeem early losing 20 percent to 30 percent of their principal."
Of course, with bonds this is a two-way street. If interest rates drop, the value of a bond rises and you can cash it in for more than you paid for it.
Unfortunately, you don't have that opportunity with a callable CD. When rates drop, the issuing institution can call the CD and issue one with a lower yield.
If you're offered a CD rate that seems too good to be true, check it out carefully. Be sure you know when the certificate matures and whether it can be called before that date.
If you buy a CD from a broker and discover it's not what you expected, Wyderko recommends that you complain vociferously to the brokerage. If that fails, take your complaint to the SEC; there is a complaint form on its Web site, at www.sec.gov.
The SEC has been successful in getting reimbursements for savers who were misled into buying callable CDs, says SEC spokesman John Nestor.