Bond laddering

Definition

Bond laddering is an investment strategy that involves purchasing bonds with different maturity dates to spread out interest rate risk and reinvestment opportunities. It aims to provide a steady stream of income and reduce the impact of fluctuating interest rates.

5 Must Know Facts For Your Next Test

1. Bond laddering helps mitigate interest rate risk by diversifying bond maturities.
2. This strategy ensures that a portion of the bond portfolio matures regularly, providing liquidity.
3. Reinvestment risk is reduced because not all bonds mature at the same time, allowing for staggered reinvestments.
4. Investors can adjust their bond ladder strategy based on changing interest rates and financial goals.
5. Bond laddering can involve various types of bonds, including government, municipal, and corporate bonds.

Review Questions

• How does bond laddering help in managing interest rate risk?
• What is one benefit of having bonds with staggered maturity dates in a portfolio?
• Why might an investor choose to use a bond laddering strategy instead of investing in bonds with similar maturity dates?

Related terms

Interest Rate Risk: The potential for investment losses due to fluctuations in interest rates.

Reinvestment Risk: The risk that proceeds from maturing investments will be reinvested at lower rates.

Diversification: A risk management strategy that mixes a wide variety of investments within a portfolio.