staggering maturities

Staggering maturities

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

See laddering.
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.
References in periodicals archive ?
A bond ladder reduces interest rate risk by staggering maturities among several bonds (each of which represents a rung on the ladder).
Staggering maturities may also ensure that you have cash coming due at regular intervals to meet any financial needs that arise.
Interest rate risk can be reduced by investing in bonds with short- and intermediate-term maturities and by staggering maturities. Call risk can be eliminated by avoiding callable bonds.