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Monday, April 25, 2005

CD Ladder

One strategy to take advantage of interest rate upswing is to purchase several multiple-term CDs, also known as CD ladder. Suppose you have $5,000 to invest. You would purchase a $1000 1-year CD, a $1000 2-year CD, a $1000 3-year CD, a $1000 4-year CD, and a $1000 5-yr CD. As each CD matures, you would renew it for the new 5-year CD. This way you will always lock up at the highest interest rate. Let's take a look at a real example with ING DIRECT's CDs: 1 Year 3.60% 2 Year 4.00% 3 Year 4.15% 4 Year 4.25% 5 Year 4.35% If you do a CD ladder with equal amounts for each of the years, your average interest rate would be 4.07%. This is higher than the 1-year CD and more flexible than the 5-year CD alone. With a CD ladder you will have a CD maturity every year and you can take that money out if you happen to need it during that time. CD ladder is a great strategy to participate in the highest yields as interest rates go up.


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