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.

laddering

An investment strategy in which bonds or certificates of deposit that have different maturities are assembled for a portfolio. For example, an investor with $50,000 might invest $10,000 in bonds with a two-year maturity, $10,000 in bonds with a four-year maturity, $10,000 in bonds with a six-year maturity, and so forth. Principal from matured bonds or CDs is either spent or reinvested in additional bonds or CDs with longer maturities at the top of the ladder. A laddered portfolio hedges interest rate changes by providing liquidity with short-term securities while at the same time providing a relatively steady source of income with long-term, fixed-income investments. Also called liquidity diversification, staggering maturities.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

Laddering.

Laddering is an investment strategy that calls for establishing a pattern of rolling maturity dates for a portfolio of fixed-income investments. Your portfolio might include intermediate-term bonds or certificates of deposit (CDs).

For example, instead of buying one $15,000 CD with a three-year term, you buy three $5,000 CDs maturing one year apart. As each CD comes due, you can reinvest the principal to extend the pattern.

Or you could use the money for a preplanned purchase, have it available to take advantage of a new investment opportunity, or use it to cover unexpected expenses.

You can use laddering to pay for college expenses, with a series of zero coupon bonds coming due over four years, in time to pay tuition each year.

And if you ladder, you can avoid having to liquidate a large bond investment if you need just some of the money or to reinvest your entire principal at a time when interest rates may be low.

Mentioned in

References in classic literature

"I seized hold of the ladder, and we returned to the back of the chateau to see if the window of the chamber was still half-open.

Was the cry a signal?--Had some accomplice of the man seen me on the ladder!--Would the cry bring the man to the window?--Perhaps!

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And Boxtel, without taking any notice of the treasures about him, so entirely were his thoughts absorbed by another inestimable treasure, let himself out by the window, glided down the ladder, carried it back to the place whence he had taken it, and, like a beast of prey, returned growling to his house.

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And the facts before me are an empty tower with a ladder, a chair, and a table."

"I say I'm dealing with much simpler things than your simple faith, with a table and a chair and a ladder. Now what I want to say about them at the start is this.

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"But," said Bazin, yawning portentously, "the ladder is still at the window."

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The question for me now is whether I am to let go this ladder and go on swimming till I sink from ex- haustion, or--to come on board here."

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During this passage, Felton related everything to Milady--how, instead of going to London, he had chartered the little vessel; how he had returned; how he had scaled the wall by fastening cramps in the interstices of the stones, as he ascended, to give him foothold; and how, when he had reached the bars, he fastened his ladder. Milady knew the rest.

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A lesser ladder still ascended to a tinier trap-door in the apex of the tower; the fixed seats looked to me to be wearing their old, old coat of grained varnish; nay the varnish had its ancient smell, and the very vanes outside creaked their message to my ears.

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The monotony of the blind trail was increased by the fact that from the moment he had started from the foot of the ladder he had counted his every step.

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Joe clung with all his strength to the ladder during the wide oscillations that it had to describe, and then making an indescribable gesture to the Arabs, and climbing with the agility of a monkey, he sprang up to his companions, who received him with open arms.

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'To have me in his service, Sir?' cried Kit, who had stopped short in his work and faced about on the ladder like some dexterous tumbler.

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