A certificate of Deposit (CD) is a deposit defined by specific time. The banks in the United States provide this financial product to their customers.
Main characteristics of Certificate of Deposit (CD)
Interest rate for CD
CD Ladder Strategy:
Though an investment with longer term of deposit attracts a high interest, the deposited money is locked for a longer period of time. Such a scheme is not preferred in the increasing rate economy. In Ladder strategy, money is deposited for a longer term, in a way that a part of the amount matures every year.
For example, a customer splits the money to be deposited in 3 CDs with term 3 year, 2 year and 1 year. At the end of one year, a CD matures and the customer reinvests it in a 3 year CD. The same cycle is followed in the second year. At the end of these 2 cycles, the depositor will have 3 CDs with term as 3 years. Hence the depositor gets the interest applicable for a 3-year CD, still having the benefit of one CD maturing every year.
Ladder Strategy is not provided by any financial institution. The investor has to plan his investments to follow the ladder strategy.