Investopedia explains 'Bond Ladder'
If an investor had one $20,000 bond that matured in five years and earned 2.5% interest per year, the investor would not have access to that $20,000 for five years. Also, if interest rates increased to 3.5%, he would be stuck earning the lower, 2.5% rate until the bond matured.
On the other hand, if the investor had five bonds worth $4,000 each that were laddered so that one bond matured each year, he only have to wait a few months to start earning a higher interest rate on a portion of his investment if interest rates increased.
At the same time, if interest rates fell from 2.5% to 1.5%, the investor would not be faced with putting $20,000 into a lower-earning investment all at once. Interest rates might go back up by the time the other bonds reached their maturity dates.
|
