What is the difference between Laddering vs Rolling Over CDs?

Question

I was looking at a www site for a bank that discusses CDs and says you can increase your earnings potential by laddering vs rolling over. Is this strictly the result of having different rates on the different CDs or is there something else I'm missing. Also, in the example given there is a table and in that table it shows a higher ROR on the 12 month CD than on the 24 month CD. That being the case, why would you ladder CDs into 24 month vehicles vs 12 month?
http://www.bankofamerica.com/deposits/checksave/index.cfm?template=cd_laddering

Answer 1

There is an inversion in the yield curve between the 12 month and the 24 month CD. The reason you might still want a 24 month CD is that in 12 months, when the 12 month CD matures, the market is expecting that the future 12 month rate will be even lower. In general the market expectation is that the return for the current 12 month CD + the return on a 12 month CD in 12 months will equal the return on a 24 month CD bought today.

Laddering is to capture the added yield of holding longer maturity debt without sacrificing all of your liquidity like you would in a bulleted structure.

Answer 2

The longer the term on the CD, the higher the interest rate. Typically, CDs come in 1yr, 2yr, 3yr, 4yr, 5yr terms. (There are others in between but ignore those).

There are two goals
1. Get the best rate possible
2. Maintain some liquidity

#1 conflicts with #2 because if you want the max rate you might go buy all 5yr CDs but then you have no short term liquidity (without penalty).

The idea behind laddering is that all at once you buy 5 CDs, one for each of the whole year terms (1, 2, 3, 4, 5 yr). In a year when the 1yr CD matures, you roll that over into a 5 year CD. It will now mature 1 year after the first 5 year CD you bought and the first 2 yr CD will be half way through its term and will expire in 1 year. After the 4th year, you will have all 5yr CDs for the maximum rate but you will never be more than 1 year from the expirary of one of them thus giving you some liquidity.

Answer 3

First of all Bank of America is not a good source because they charge hidden fees and give you the least amount of interest compared to other banks.

Laddering gives you the option to shop around for high yield cds and rolling over gives the bank the option to shop around with your money and they normally buy a cd that gives lower interest so they earn money.