Laddering Maturities

by Austin Bank 16. December 2015 16:33

Financial Idea of the Month


Are You Laddering Your CD Maturities?

Choosing the length of savings certificates is an important decision. Longer maturity certificates usually provide the higher returns, but they also tie up your funds longer. Shorter maturities provide more liquidity and the flexibility to take advantage of rising rates, but with usually lower returns. Ideally, you would want the highest current return coupled with liquidity and the ability to invest at higher rates if interest rates rise.

Building a "ladder" of maturities is a way to create a "portfolio" of certificates that enables you to earn good rates, have some liquidity and be able to lock in higher rates if interest rates rise. Simply stated, with this strategy, you divide your funds into pieces and buy equal amounts of different maturity certificates. Here is an example:

Let us assume you have $25,000 and want to buy certificates with maturities up to five years. The rates on certificates are:


1 year


2 year


3 year


4 year


5 year







 By making initial purchases of $5000 each of the different maturities, your average rate would be about 1.52%. Each year, as a certificate matures, you use the proceeds to buy a new 5-year certificate. That way, as time goes on, more and more of your funds would be earning the highest rate and you would still have annual liquidity. If rates rise, you have liquidity to buy higher yielding certificates. If rates fall, you are still earning high rates on your existing positions.


No one can accurately predict the future of interest rates. Using this "Ladder of Maturities" strategy can help position you to benefit regardless of the direction of interest rate changes.





Financial Planning | Investments | Laddering Maturities

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