Bond laddering
Definition
Bond laddering is an investment strategy that involves purchasing bonds with different maturity dates to spread out interest rate risk and reinvestment opportunities. It aims to provide a steady stream of income and reduce the impact of fluctuating interest rates.
5 Must Know Facts For Your Next Test
- Bond laddering helps mitigate interest rate risk by diversifying bond maturities.
- This strategy ensures that a portion of the bond portfolio matures regularly, providing liquidity.
- Reinvestment risk is reduced because not all bonds mature at the same time, allowing for staggered reinvestments.
- Investors can adjust their bond ladder strategy based on changing interest rates and financial goals.
- Bond laddering can involve various types of bonds, including government, municipal, and corporate bonds.
Review Questions
- How does bond laddering help in managing interest rate risk?
- What is one benefit of having bonds with staggered maturity dates in a portfolio?
- Why might an investor choose to use a bond laddering strategy instead of investing in bonds with similar maturity dates?
"Bond laddering" appears in:
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Related terms
Interest Rate Risk: The potential for investment losses due to fluctuations in interest rates.
Reinvestment Risk: The risk that proceeds from maturing investments will be reinvested at lower rates.
Diversification: A risk management strategy that mixes a wide variety of investments within a portfolio.
