The Comprehensive Guide to

Passive Income Investing


Learn the secrets of how Paul Tracy generates over $XXX,XXX per month in passive income!

How to Become Financially Independent Through Passive Income Investing

What is Bond Laddering?

Bond laddering is a bond investment strategy whereby an investor staggers their portfolio with bonds according to their maturity so that the bond proceeds can be reinvested at regular intervals.

How Does Bond Laddering Work?

For example, say you have $75,000 to invest. To incorporate bond laddering into your portfolio, you could invest $25,000 in a one-year bond at 6%, $25,000 in a two-year bond at 6.25% and $25,000 in a three-year bond at 6.50%. The 'rungs' on the ladder correspond to each year.

Now, when the one-year bond matures, you would reinvest the proceeds in a three-year bond. At the end of the second year, you would put the proceeds from the matured two-year bond into a three-year bond, and so on. Here is how the strategy looks using our example:

bond ladder

Why Does Bond Laddering Matter?

There are many advantages to bond laddering. Bond-fund investors should read their funds' prospectuses, because many fund managers use the strategy. The first advantage of bond laddering is that it allows investors to gain from interest rate increases since the investor is able to reinvest some of his or her capital each year at market rates. Second, the inherent diversification in bond laddering can help an investor create a steady income stream. Third, laddering gives the investor regular liquidity because a portion of the portfolio is never more than a year away from maturity. Bond laddering enables investors to have liquidity while, at the same time, taking advantage of the higher yields offered by longer-term bonds. Fourth, the diversification also suppresses some of the investor's call risk, reducing the chance that the entire portfolio would be called away.

However, there are some drawbacks to bond laddering. First, the transaction costs of purchasing several bonds are often higher than purchasing one large bond. Second, the constant maturing does present some reinvestment risk to the investor if interest rates are falling.

Ask an Expert about Bond Laddering

All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Bond Laddering.

Be the first to ask a question

If you have a question about Bond Laddering, then please ask Paul.

Ask a question
Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.