staggering maturities

Staggering maturities

Hedging against interest rate movements by investment in short-, medium-, and long-term bonds.

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.

staggering maturities

See laddering.
References in periodicals archive ?
Interest rate risk can be reduced by investing in bonds with short- and intermediate-term maturities and by staggering maturities.
The company took prudent steps including staggering maturities and abstaining from share repurchases to strengthen its financial position during 2009.