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I understand that CD ladders are a mechanism to take advantage of the various interest rates offered for different time periods. Given that, is there any point investing in longer and longer term CD's unless the APY is (at least slightly) higher each time?

Marcus (Goldman Sachs) offers the same return (1.0%) for the 4-year CD as it does for the 3-year, 2-year, and 1-year. Is this why shopping around is important for CD's? I see that another bank, ManhattanLife (never heard of it) is offering 2.60% for their 3-year term. I would have liked, purely for convenience, to hold all of my CDs at the same bank, but is being creative and using different banks a necessary part of a successful CD ladder?

Cloudy
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3 Answers3

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Another reason to invest in longer term CDs is to hedge against rates going down in the future. There might not be much difference in a 3 year and a 4 year in terms of rate but in 3 years that CD purchase could look like a great move (or bad move depending on what happens with rates).

Also, unless you have a specific reason to stick with one financial institution, it would only make sense to rate shop a product like this as it takes very little to establish/maintain.

user1723699
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This all depends on the goal of your ladder and a bit of looking into the "crystal bll". Basically the banks think that interest rates will be lower in the future so they are not looking to pay more for longer term CDs. Currently, where I see this, is in the shorter term CDs. All the 3, 6, 9, and 12 month CDs are all paying the same (.15%).

The assumption of the CD ladder theory is that longer term CDs always pay more. Obviously that is not the case currently and requires some examination of your goals and outlook of the economy.

This is very opinion based, but I have been buying only shorter term CDs. You have to make your own decision. Keep in mind that your decision may not be optimal. We tend to beat ourselves up for sub-optimal decisions (at least I do). However, you should take comfort in the fact you are using your hard earned money to make more money.

Pete B.
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One reason for using a CD ladder is to stagger the maturity dates over the year. When starting out it is typical to buy CDs of differing lengths but the same start date. Then as each of the shorter ones matures roll them over to a longer CD.

For example:

  1. Buy a 3 month, 6 month, 9 month, 12 month CD
  2. Approximately 90 days later as the first CD matures buy a 12 month CD
  3. Approximately 90 days after that use the funds from the 2nd CD to buy a 12 month CD.
  4. Approximately 90 days after that as the 3rd CD matures buy a 12 month CD
  5. Approximately 12 months after the first purchase roll over the 4th CD into 1 year CD.

Now you have 4 CD later, with one maturing every quarter. When starting it doesn't matter if there is a interest rate difference between two CDs, the goal is to stagger the terms.

You could do the same with longer length CDs.

mhoran_psprep
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