Bond Ladders

A Time-Tested Investment Strategy Geared For Increased Predictability, Control and Performance.

How A Bond Ladder Works
A bond ladder is a strategy for managing fixed-income investments, such as certificate of deposits (CDs, U.S. Treasury notes and bonds, municipal bonds, corporate bonds and zero coupon bonds.

To build a ladder, simply divide your investable dollars evenly among bonds or CDs that mature at regular intervals, for example, every six months or once a year.

In the example below, we divide $50,000 into five $10,000 investments with the first bond maturing in one year and the fifth in five years.

The bond ladder strategy offers you many benefits:

Higher Average Yields
Generally, the longer a bond’s maturity, the higher the yield. A bond ladder combines the higher yields of longer-term bonds with the liquidity of shorter-term bonds.

More Consistent Returns
If interest rates rise, newly purchased bonds take advantage of improved rates. If interest rates fall, your prior laddered holdings will most likely produce more income than could be achieved at the current levels. The result may be a more consistent yield.

Less Reinvestment Risk
With a bond ladder, you lessen reinvestment risk-the risk that all income assets mature when yields are low, forcing you to accept less income or choose riskier, higher-yielding investments. A bond ladder strategy can reduce the impact of this risk. However, this requires an ongoing commitment to the program.

More Peace of Mind
In addition to diversifying your principal in bonds with different maturities, you can also build your bond ladder with different issuers and credit ratings. By doing so, you have potential to benefit from the additional diversification.

Ongoing Liquidity
With a bond ladder, you have one or more bonds maturing on a regular basis. You can choose to reinvest your principal in another bond or redirect the funds for another purpose. Should you need extra cash, liquidating your shorter maturities should have minimal impact on your portfolio's overall yield.

Risks
Every investment involves a risk/reward trade-off. The less risk you are willing to assume, the lower the yield or return you can typically expect from an investment. Generally speaking, bond investors demand higher yields for shouldering market risk and credit risk.

Market risk is simply another way of describing the inverse relationship between bond prices and interest rates. If interest rates are rising and you don't want much fluctuation in your bond portfolio, stay short-term. Although rising interest rates push all bond prices down, in general, the longer a bond's time to maturity the greater its price sensitivity. By concentrating on short-term bonds, you may be less exposed to market risk - a comfortable posture for many.

On the other hand, if interest rates are falling from currently high yields, income-oriented investors may want to purchase longer-term securities. This strategy enables you to own an attractive yield that may not be available in the future. Because interest rates are difficult to predict with accuracy, you may want to own short- or intermediate-term bonds (up to 10 years) and simply hold them to maturity. Bond ladders can be structured with short-, intermediate-, or long-term bonds. The bond ladder concept is a strategy many investors to follow with a goal to minimize market risk. Credit risk is the risk that the issuer won't make timely interest or principal payments. If you are concerned about default, construct your bond ladder with Treasury securities, high-quality or insured municipal bonds, or corporate bonds. Although you may sacrifice some yield, you'll have peace of mind knowing you own high-quality securities.
 

This report is prepared for general circulation and is for informational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or service. Market prices and other data may be obtained from outside sources and is not warranted as to completeness or accuracy. Any comments, statements and/or recommendations made herein do not necessarily reflect those of First Allied Securities, Inc., its subsidiaries or affiliates, and are subject to change without notice.