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Laddering a CD

Can you explain how to ladder CDs?

 

Laddering means staggering deposits into investments such as CDs in order to vary and better the rate of return.

For example, you go to the bank with $25,000 and buy a $5,000 one-year CD, a $5,000 two-year CD and so on until your last $5,000 buys you a five-year CD.

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Each year is a rung on the ladder. When the one-year CD matures, you reinvest that money in a five-year CD because by that time your five-year CD has four years left until it matures. As each year's CD comes due, you roll it into a five-year CD.

When CD yields are low, ladder the intervals much closer together, such as three-month, six-month and one year.

 

Bankrate.com's corrections policy
-- Updated: Nov. 17, 2005
 
 
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