It is a common strategy or method which allows for a regular redemption program.
Here's how it works;
Let's take that 200K.
Constructing a ladder would mean splitting that 200 thousand into say....20 lots of ten grand each.
The first 10K I'm going to buy 10 CD's (Or bonds, but I'll stick with CD's. It all works the same) that matures in 30 days.
The next 10K I'm going to buy 10 CD's that mature in 60 days.
The next 10K I'm going to buy 10 CD's that mature in 90 days.
Etc. etc. all the way out to 20 months.
(here's the edit) It doesn't have to be set up that way at all, either. The steps of the ladder can be 60 day apart, 90 days, 6 months, a year, two years etc. It's all the same. The thing is, in an environment like we have right now with rates so low, you would want to be prepared to take advantage as rates begin to rise. Keeping the maturities tight and near term allows for this.
This way, each and every month I have $10,000 that is redeemed and I can do with it as I wish, either buy another set of CD's or keep it as cash. If one wishes to perpetuate the ladder, then one just buys another set of CD's at the longest maturity - in this case 20 months.
The advantage here is that as rates rise, you have a regular lump of cash to buy at the longest maturity - that which pays the highest rate - and you are always taking advantage of an increase in rate.
The downside to doing this with CD's is liquidity. There are likely to be fees or costs associated with early surrender if the investor wishes to get his hands on all 200K at a given moment.
This is one advantage to US Treasuries, in that they are as liquid as cash. They settle same day, as opposed to the "Trade plus 3" rule that applies to almost every other security.
As far as which I would pick, it would really depend on how much I needed the liquidity. If I was quite sure I wouldn't need the entire two hundred thousand, then I would go the CD route, as you're likely to get a better rate. It boils down to that simple question.
What are the chances I'll need the money all at once, sometime in the future?
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