DEFINITION of 'Bond Laddering'

A portfolio management strategy and model for investing in fixed income that involves purchasing multiple bonds, each with different maturity dates, in order to achieve the following goals:

- Decrease interest rate risk by holding both short-term and long-term bonds, thereby spreading risk along the interest rate curve. If rates are rising, as one bond matures the funds can be re-invested into higher yield bonds.
- Decrease re-investment risk because as one bond in the ladder matures, the cash is re-invested, but it only represents a portion of the total portfolio. Even if prevailing rates at the time of re-investment are lower than the previous bond was returning, the smaller amount of reinvestment dollars mitigates the risk of investing a lot of cash at a low return.
- Maintain steady cash flows to encourage regular saving for investors looking for an income-producing portfolio.

BREAKING DOWN 'Bond Laddering'

Bond laddering tends to decrease the overall risk of a fixed income portfolio. The one downside is that the potential for outsized returns compared to a relevant index is limited because the investor is holding a diversified portfolio in terms of maturation dates. The type of investor who uses this strategy usually places safety of principal and income above portfolio growth.

RELATED TERMS
  1. Bond Ladder

    A bond ladder is a portfolio of fixed-income securities in which ...
  2. Fixed Income

    Fixed income is a type of investment in which real return rates ...
  3. Current Maturity

    The current maturity is the interval between the present date ...
  4. Bond

    A bond is a fixed income investment in which an investor loans ...
  5. Bond Fund

    A bond fund is a fund invested primarily in bonds and other debt ...
  6. Conditional Call Option

    A conditional call option requires a bond's issuer to replace ...
Related Articles
  1. Investing

    Key Strategies To Avoid Negative Bond Returns

    It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses.
  2. Investing

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  3. Investing

    5 Fixed Income Plays After the Fed Rate Increase

    Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.
  4. Investing

    5 Best Ways to Earn Interest

    Learn how to use tools to increase your interest earnings. Use compounding interest and breakpoints to increase your interest income.
  5. Investing

    Six biggest bond risks

    Bonds can be a great tool to generate income, but investors need to be aware of the pitfalls and risks of holding corporate and/or government securities.
  6. Investing

    Corporate Bonds for Retirement Accounts

    Corporate bonds are usually the preferred choice in retirement accounts. Here are some of the benefits of corporate bonds, and strategies for a portfolio.
  7. Investing

    How to Manage Risk With Bonds in Your Portfolio

    Bonds are not immune to risk, so be sure to diversify your portfolio with proper asset allocation.
  8. Investing

    Understanding Interest Rates, Inflation And Bonds

    Get to know the relationships that determine a bond's price and its payout.
  9. Investing

    How Bonds Are Vital to a Successful Portfolio

    While bonds are a vital part of an investment portfolio, they are often ignored.
RELATED FAQS
  1. What are the risks of investing in a bond?

    Are you thinking of investing in bond market? Learn more about bond market investment risk, including interest rate risk, ... Read Answer >>
Trading Center