Ladder strategy

Ladder strategy

A bond portfolio construction strategy that invests approximately equal amounts in every maturity within a given range.

Ladder Strategy

An investment strategy in which one invests in several securities with different maturities. When the first one matures, the yield may or may not be used to buy another security. It is used most often with bonds and certificates of deposit. Laddering protects the investor from interest rate risk by locking in interest rates at once.

Suppose one does not use laddering: one may invest $30,000 in a five-year bond with a 4% coupon. When the bond matures, prevailing interest rates may have dropped to 2%, making it impossible to achieve the same profit reinvesting in the same type of bond. Had this investor used laddering, he/she would have put, say, $10,000 into three bonds: a five-year bond at 4%, a seven-year bond at 5.5%, and a 10-year bond at 6%. That way, if prevailing interest rates drop to 2% in five years, this only affects the reinvestment of one third of the initial $30,000 investment. This practice is also called staggering maturities or liquidity diversification.
References in periodicals archive ?
But you suggest a ladder strategy that your client, a 45-year old male non-smoker, purchase three $1 million term policies, a 10-year for the mortgage, 15-year for education expenses, and a 20-year to replace income.
Investors have the option to either invest the proceeds from RQD into a subsequent maturity of an RBC Target Maturity Corporate Bond ETF or to utilize the proceeds in a ladder strategy to help manage interest rate and reinvestment risk.
As the newest addition to its smart beta fixed-income lineup, LDRI employs an equal weighted annual maturity ladder strategy that may help investors to mitigate interest-rate risk while generating income.
The annuity ladder strategy is something that I would never recommend.
The ladder strategy involves dividing your money evenly among bonds that mature at different intervals.
CINCINNATI -- In yesterday's edition of Advanced Options, we analyzed a way to make money on a stock's momentum with the short put ladder strategy.