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. Reinvestment Risk

    The risk that future coupons from a bond will not be reinvested ...
  2. Reinvestment Rate

    The amount of interest that can be earned when money is taken ...
  3. Fixed Income

    Fixed income is a type of investment in which real return rates ...
  4. Average Effective Maturity

    For a single bond, it is a measure of maturity that takes into ...
  5. Term To Maturity

    The remaining life of a financial instrument. In bonds, it is ...
  6. Bond

    A bond is a fixed income investment in which an investor loans ...
Related Articles
  1. Investing

    Boost Bond Returns With Laddering

    If you want a diversified portfolio and steady cash flow, check out this fixed-income strategy.
  2. 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.
  3. Investing

    Six Biggest Bond Risks

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

    The Effect of Fed Fund Rate Hikes on Your Bond Portfolio

    Learn how an increase in the federal funds rate may impact a bond portfolio. Read about how investors can use the duration of their portfolio to reduce risk.
  6. Investing

    Lowering Portfolio Volatility With Certain Bond ETFs (AGG, BND)

    Learn about how overall portfolio risk can be reduced by adding a variety of different types of bond ETFs to a primarily stock portfolio.
  7. Investing

    Top 4 Strategies For Managing A Bond Portfolio

    Learn more about popular passive, quasi-passive, immunization and active bond strategies and how you can put them to work for you.
  8. Investing

    How Rising Interest Rates Impact Bond Portfolios

    A look at the impact that changing interest rates - rising or falling - have on bonds and what investors need to consider.
  9. Investing

    Will Bond Fund Returns Suffer if Interest Rates Rise?

    When the Fed decides to raise interest rates again, bond fund returns could suffer in the short term. But some say the impact may not be all that severe.
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present values of cash inflows and outflows. Used in capital budgeting ...
  2. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. ...
Trading Center