CD Ladder Calculator

How to Calculate CD Ladder Interest and Earnings

A CD Ladder is an investment strategy where you divide your total investment into equal portions and invest them in CDs with different maturity dates. This strategy allows you to take advantage of higher interest rates on longer-term CDs while maintaining some liquidity. Here's how to calculate the interest and earnings on a CD Ladder:

CD Ladder Interest Formula

For each rung in the CD Ladder, we use the compound interest formula:

$$A = P(1 + \frac{r}{n})^{nt}$$

Where:

• A = Final amount for each rung
• P = Principal (investment per rung)
• r = Annual interest rate (in decimal form)
• n = Number of times interest is compounded per year
• t = Number of years (which is equal to the rung number)

Calculation Steps

1. Determine the total investment amount, number of rungs, average annual interest rate, and compounding frequency.
2. Calculate the investment per rung by dividing the total investment by the number of rungs.
3. Convert the annual interest rate to decimal form (divide by 100).
4. For each rung, apply the formula to calculate the final amount (A).
5. Sum up all the final amounts to get the total final amount.
6. Calculate the total interest earned by subtracting the total initial investment from the total final amount.
7. Calculate the Annual Percentage Yield (APY) using the formula: APY = (1 + r/n)^n - 1

Example Calculation

Let's calculate the earnings for a CD Ladder with the following terms:

• Total Investment = $10,000
• Number of Rungs = 5
• Average Annual Interest Rate = 2.5% = 0.025
• Compounding Frequency = 12 (monthly)

Step 1: Calculate investment per rung

Investment per rung = $10,000 / 5 = $2,000

Step 2: Calculate final amount for each rung

Rung 1: A = 2000(1 + 0.025/12)^(12 * 1) = $2,050.63

Rung 2: A = 2000(1 + 0.025/12)^(12 * 2) = $2,102.53

Rung 3: A = 2000(1 + 0.025/12)^(12 * 3) = $2,155.74

Rung 4: A = 2000(1 + 0.025/12)^(12 * 4) = $2,210.29

Rung 5: A = 2000(1 + 0.025/12)^(12 * 5) = $2,266.20

Step 3: Calculate total final amount

Total Final Amount = $2,050.63 + $2,102.53 + $2,155.74 + $2,210.29 + $2,266.20 = $10,785.39

Step 4: Calculate total interest earned

Total Interest Earned = $10,785.39 - $10,000 = $785.39

Step 5: Calculate APY

APY = (1 + 0.025/12)^12 - 1 = 0.02528 = 2.53%

Therefore, after 5 years, the CD Ladder will be worth $10,785.39, with $785.39 in interest earned. The APY is 2.53%.

Visual Representation

This diagram illustrates the growth of each rung in the CD Ladder over the 5-year term. The blue bars represent the initial investment of $2,000 per rung, while the green bars show the interest earned for each rung. As you can see, longer-term CDs (higher rungs) earn more interest due to the compound interest effect.