Definition
The term bond ladder refers to an investment strategy involving the purchase of fixed income securities with staggered maturity dates. The bond ladder strategy helps investors to manage interest rate risk and provides them with the opportunity to make a series of reinvestment decisions over time.
Explanation
The bond ladder strategy involves the purchase of fixed income securities with dissimilar maturity dates. By dividing a portfolio among a series of bonds with varying maturities, the investor can minimize interest rate risk and increase their portfolio's liquidity.
Bond laddering is achieved by purchasing a series of bonds that are evenly spaced across the investor's desired liquidity timeframe. For example, an investor may choose bonds that mature each quarter over a ten year timeframe.
Laddering also allows the investor to minimize the impact interest rates have on their portfolio, for example:
If interest rates fall, the investor will only be reinvesting a portion of their fixed income portfolio.
If interest rates rise, they can take advantage of this increase when the next bond in their portfolio reaches its maturity date.
Successfully executing a bond ladder strategy requires the following:
The investor has enough money to meet their near term needs as well as emergent issues, so they can hold the bonds to maturity.
The investor also needs to have sufficient funds to build their portfolio. Generally, a laddered portfolio will have a total value in excess of $100,000.
Purchasing bonds of investment quality (or avoiding junk bonds), since a portion of the portfolio may be held for a relatively long period of time.
Finally, the investor should not purchase bonds that are callable, since that may force them to reinvest a portion of their portfolio before the scheduled maturity date.
Related Terms
The term harvest strategy refers to the planned discontinuation of new investments in a line of business or product so the maximum profits can be extracted from it. Harvest strategies are oftentimes used when a product is nearing the end of its lifecycle, or the usefulness of a service is nearly over.
Moneyzine EditorJanuary 19th, 2024
The term Halloween strategy refers to the selling of stock before May and not investing in equities again until the end of October. The Halloween strategy is based on a theory that the months of November through April provide investors with stronger capital gains than the remainder of the year.Moneyzine EditorJanuary 19th, 2024
The term fixed income strategy refers to several options an investor has when purchasing securities such as bonds. The three primary fixed income strategies include ladders, barbells, and bullets.Moneyzine EditorJanuary 18th, 2024
The term exit strategy refers to a process by which an owner plans to withdraw their investment in a business. Exit strategies are important to venture capitalists, since extracting their money from a business allows them to reinvest those funds elsewhere.Moneyzine EditorJanuary 17th, 2024
The term event-driven strategy refers to an investment approach that attempts to exploit pricing inefficiencies that occur after significant corporate announcements. Event-driven strategies are used by large institutional investors when a company notifies the public of plans that will impact their future earnings potential.Moneyzine EditorJanuary 17th, 2024
The term bullet strategy refers to an investment approach involving the purchase of fixed income securities that mature in the same timeframe. The bullet strategy is oftentimes used by investors that need funds on a certain date.Moneyzine EditorJanuary 9th, 2024
The term barbell strategy refers to an investment approach involving the purchase of fixed income securities with both long and short term maturities. The barbell strategy typically applies to bonds, and is thought to provide the investor with a portfolio that balances risk and reward.Moneyzine EditorJanuary 8th, 2024
