How a CD ladder works
By Jude Wallis
A CD ladder is cash split across certificates of deposit that mature in sequence. One rung of $8,000 at 4 percent for one year becomes $8,320. A two-year rung of $8,000 at 4.5 percent becomes $8,736.20. The ladder is the stagger, not a new compounding formula.
Balance after 10 years
$41,872.85
$12,872.85 of that is interest you did not pay in.
- You put in
- $29,000.00
- Interest earned
- $12,872.85
- Ending balance
- $41,872.85
How often interest is added to the balance.
On this page
In short
- Each rung is an ordinary time deposit with its own rate and term.
- $8,000 at 4 percent for one year becomes $8,320, with $320 of interest.
- $8,000 at 4.5 percent for two years becomes $8,736.20, with $736.20 of interest.
- The ladder's point is liquidity at each maturity, plus a mix of short and longer rates, not a single blended APY on this sheet.
Several CDs, not one blended account
A certificate of deposit locks a rate for a term. A ladder buys several CDs with staggered maturities so that cash comes free on a schedule, and so that not every dollar is stuck in the longest term.
This sheet prices two rungs separately. $8,000 at 4 percent for one year, compounded yearly, becomes $8,320. Interest is $320. A second rung of $8,000 at 4.5 percent for two years becomes $8,736.20. Interest is $736.20.
How APR and APY work is the compounding convention on a deposit. How FDIC insurance works is the coverage cap if the CD is at an insured bank.
Why the stagger exists
If both rungs sat in the two-year CD, nothing would mature for two years without an early-withdrawal penalty. If both sat in the one-year CD, the longer rate on this sheet would be missed. The ladder holds both.
When the one-year rung matures, that $8,320 can be spent or rolled into a new long rung. The two-year rung keeps running. That roll is a later decision. This page stops at the two ending values.
The compound interest calculator on this page is one rung at a time. Savings account types is the product menu a CD sits in.
A ladder is not a bond ladder's duration maths
A Treasury or corporate bond ladder has duration, price risk if sold early, and coupons. A CD ladder at a bank is a set of time deposits. Breaking a CD early is usually a penalty, not a market-price move.
How bond duration works is the marketable-bond object. How money market funds work is a fund alternative with daily liquidity and no CD penalty.
APY is how a bank often quotes the rung. This sheet uses a simple annual compound so the two rates are the only moving part.
Scope of this sheet
The two teaching rungs are $8,000 at 4 percent for one year ($8,320) and $8,000 at 4.5 percent for two years ($8,736.20). They are not an early-withdrawal penalty, not a blended ladder APY, and not a call feature. This is educational material, not financial advice.
Worked examples
A one-year rung of \$8,000 at 4 percent
A CD of $8,000 earns 4 percent, compounded once at year end, for one year. What is the ending value?
- Ending value is , so $8,320.
- Interest is $320.
The one-year rung ends at $8,320. Interest is $320 on the $8,000 principal.
A two-year rung of \$8,000 at 4.5 percent
A CD of $8,000 earns 4.5 percent, compounded once a year, for two years. What is the ending value?
- Year one: .
- Year two: , so $8,736.20.
- Interest is $736.20.
The two-year rung ends at $8,736.20. Interest is $736.20 on the $8,000 principal.
Common questions
Is the ladder's return the average of 4 percent and 4.5 percent?
No. Each rung compounds on its own principal at its own rate. An average of the two rates would ignore that the two-year rung runs longer and that the one-year rung can be rolled at a later rate.
What happens if I need the two-year money after one year?
A bank CD usually charges an early-withdrawal penalty. That penalty is a contract term, not this compound-interest identity.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.