What is a Bond Ladder?
How Does a Bond Ladder Work?
For example, say you have $75,000 to invest. To create a bond ladder, you could invest $25,000 in a one-year bond at 6.25%, and $25,000 in a three-year bond at 6.50%. Each year is considered a "rung" on the ladder.
Now, when the one-year bond matures, you would reinvest the proceeds in a three-year bond. At the end of the second year, you would put the proceeds from the matured two-year bond into a three-year bond, and so on. Here is how the strategy, using sample data, looks visually:
Why Does a Bond Ladder Matter?
There are several advantages to bond laddering, and many capital at rates. Second, the diversification inherent in laddering can help stabilize the investor's income stream. Third, laddering gives the investor liquidity because a portion of the portfolio is never more than a year away from maturity.managers use this strategy. The first advantage is that bond laddering can allow investors to benefit from increases in interest rates because the investor is able to reinvest the maturing portion of his or her
There are some drawbacks to laddering, however. First, the transaction costs of purchasing several may be higher than purchasing one large . Second, the constant maturing does present some reinvestment risk to the investor if interest rates are falling instead of rising.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
When I went to kindergarten, it didn’t take me long to get in trouble. At the very first parent-teacher meeting, my mother was informed that I was quite a little talker in class. My teacher...Read More →
What's the biggest mistake investors make? Analyzing a company's prospects without paying any attention to the bigger picture. With that in mind, here's how to assess the big...Read More →
Mexico and Brazil had a big problem several decades ago. They had a small but very wealthy...Read More →
Mutual funds are one of the great success stories in the history of financial services. In 1970, just 360 funds existed in the United States, with assets under...Read More →