Managing Volatility with a Bond Ladder

During the past decade, bond investors have faced a remarkable period of interest-rate volatility. In the 10 years ending in 2007, the Federal Reserve adjusted the federal funds target rate, which influences the interest rates that consumers pay and bondholders earn, 41 times.¹

One way to help manage interest-rate risk and cash flow from bonds is to construct a bond ladder. This enables bondholders to benefit when interest rates are high and to help minimize the effect when rates are low.

Step by Step

With a bond ladder, the bonds mature in intervals rather than all at once. To set up a six-year bond ladder, a bondholder might purchase five different bonds with maturity dates of two, three, four, five, and six years, respectively. When the first bond matures after two years, the bondholder could purchase a new six-year bond to keep the ladder intact. If interest rates have risen, the investor benefits from having cash available to invest in a new bond at the higher rate. If interest rates have fallen, only a portion of the portfolio is subject to the lower rate.

The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk.

A bond ladder can help provide some stability during periods of interest-rate volatility. Call today to determine whether a bond ladder could help reduce your portfolio’s exposure to interest-rate risk.

1) Federal Reserve, 2008

This material was written and prepared by Emerald Publications.
© 2008 Emerald Publications