Bond Ladder

Instead of putting all their money into bonds maturing on one date, an investor spreads it across a range of maturities, like the rungs of a ladder.

For example, an investor with 50,000 might buy five bonds of 10,000 each, maturing in one, two, three, four and five years. Each year, one bond matures. The investor can spend the money or reinvest it in a new five-year bond, keeping the ladder going.

Bond ladders reduce interest rate risk and reinvestment risk. If rates rise, maturing bonds can be reinvested at higher rates. If rates fall, the investor still has longer bonds locked in at older, higher rates. They also provide predictable income and access to money at regular intervals, which suits retirees and people planning for known future expenses.

Ladders can be built with government bonds, corporate bonds, certificates of deposit or defined-maturity bond funds. Holding individual bonds to maturity avoids having to sell when prices fall, although the investor still faces the credit risk of the issuers.