LaSalle National Bank is claiming success with an unusual certificate of deposit it began selling through brokers late last year.
Dubbed the Callable Multi-Step CD, it pays an interest rate in the first year that will increase over time. The interest rate payments are structured to be slightly higher than those paid on CDs of similar duration.
Currently the Callable Multi-Step CD's first-year interest rate is 7.8% The interest payments step up a notch every year until they reach 11% in the 10th year.
The catch is that LaSalle can opt to pay the customer his principal and accrued interest after the first year, or every six months thereafter.
William C. Miller, senior vice president of LaSalle's broker-dealer services division, contended that the CD is a good bargain for depositors looking to beat inflation.
So far investors seem to agree. LaSalle introduced the callable CD in October and since then has racked up sales of more than $250 million.
"The guy who buys this is already ahead of the game," Mr. Miller said.
The Chicago-based bank is wholesaling the CD to brokers, who then sell it to consumers who can buy it for a minimum deposit of $5,000 and additional increments of $1,000. No withdrawal is allowed, except in cases of death or other unusual circumstances.
Mr. Miller said LaSalle would call the CDs and pay off principal and accrued interest only if needed to handle its own financing needs.
The company is entering into interest rate swap agreements to hedge the exposure of the CDs. If those agreements are called by dealers, the bank may have to call in some CDs to minimize interest rate exposures.
Step-up CDs have become more popular since interest rates began to rise early last year, said Gail Lieberman, editor of Bank Rate Monitor, Boca Raton, Fla.
But she added that few companies combine the call option with the rising interest payments.
"If the banks won't come up with the (higher) rates, then they have to put in a new wrinkle," Ms. Lieberman said.
Long-term callable CDs are not normally sold to retail investors, she said. Instead, they are normally the province of institutional money managers.
But Ms. Lieberman expects more banks to target retail customers as the appetite for mutual funds wanes.
"I think there will definitely be more products like this now that money is pouring back out of mutual funds," said Ms. Lieberman.
But some brokers aren't convinced that the callable CD will have a mass market.
"These CDs are for people that truly believe that rates will go up, and go up slowly," said Stuart Arnold, an account executive with the brokerage firm Ohio Co. in Indianapolis.
Mr. Arnold added that most people who believe rates will go up would be more comfortable parking money in short-term investments.