This Week’s Topic: Bond Ladders
A “ladder” structure of bonds is one in which bonds in a portfolio are redeemed at different times over a period of years, with each bond becoming due at a different “rung” or year on the redemption ladder. In this way, the portfolio is sure to have a mix of short-term, intermediate, and long-term bonds. This is an easy and reliable way to help insulate a portfolio from interest rate risk.
But how do you determine where on the ladder to place a particular bond: By its call year? Its sinking fund year? Its maturity year? How do you determine whether to weight one time segment of the bond ladder more or less heavily than the other segments, and by how much? These are issues that must be addressed in building a bond ladder.
Bond Laddering does not assure a profit or protect against a loss in a declining market. Yields and market values will fluctuate, and if sold prior to maturity, bonds may be worth more or less than the original investment.