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Bond ladder

Portfolio > Portfolio Construction

How to Use a Bond Ladder to Create an Income Stream for Clients

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What You Need to Know

  • A bond ladder entails buying several bonds that mature at different points in time.
  • A bond ladder is a good strategy to help mitigate interest rate risk.
  • Bond ladders can be built with different types of bonds as well as some types of bond ETFs.

There are a number of ways that your clients can invest in bonds. These include bond mutual funds and ETFs, as well as individual bonds. A bond ladder using individual bonds can be a way to help build predictable income and reduce bond risk with all or a portion of your client’s fixed income portfolio allocation.

What Is a Bond Ladder Strategy?

A bond ladder entails buying several bonds that mature at various points in time, typically regular intervals. For example, your client might have a series of bonds that mature every six months over a three- or five-year period. They might have bonds that mature every year or every two years over a five- or 10-year period. The interval of bond maturities as well as the length of the overall period the ladder covers can vary based on your client’s needs and preferences.

Beyond just bonds, a ladder of CDs can also be created. It would work in the same way as a bond ladder, with a series of CDs that mature at predetermined intervals.

How Does a Bond Ladder Work?

Here is an example of how a bond ladder might work for your client. The ladder might consist of a series of five high-quality corporate bonds each maturing two years apart.

Time to maturity Par value Coupon rate Annual income
 Bond 1  2 years  $20,000  2.5%  $500
 Bond 2  4 years  $20,000  3.0%  $600
 Bond 3  6 years  $20,000  3.25%  $650
 Bond 4  8 years  $20,000  3.5%  $700
 Bond 5  10 years  $20,000  4.0%  $800

The annual income from the initial ladder is $3,250 or 3.25% on an investment of $100,000, assuming all of the bonds were purchased at their par value.

Once Bond 1 matures in two years, your client would replace it with a bond maturing in 10 years if they wanted to maintain the same ladder. The new ladder might look like this:

Time to maturity Par value Coupon rate Annual income
 Bond 2  2 years  $20,000  3.0%  $600
 Bond 3  4 years  $20,000  3.25%  $650
 Bond 4  6 years  $20,000  3.5%  $700
 Bond 5  8 years  $20,000  4.0%  $800
 Bond 1A  10 years  $20,000  4.25%  $850

In this case, with the addition of the new 10-year bond (Bond 1A), the ladder’s annual income would be $3,600 with an annual yield of 3.6%.

An investor can have more than one bond ladder. For example they might have a ladder of Treasury maturing at intervals over a five-year period and a ladder of investment-grade corporates maturing over an eight-year period.

A bond ladder can be used as part of your client’s allocation to bonds. They might also hold bond mutual funds or ETFs focusing on certain types of bonds and bond durations.

What Are the Benefits of a Bond Ladder?

The main benefits of a bond ladder include the ability to manage interest rate risk and to manage cash flow.

Interest rate risk is a factor both when interest rates rise and when they fall. When interest rates rise, the value of the various bonds in the ladder will decrease. By holding the bonds until maturity, your client will receive the par value of the bond upon redemption instead of a lower value should they sell it when the price is depressed prior to maturity.

During a period of falling interest rates, the rates on new bonds that may be purchased at the long end of the ladder to replace maturing bonds will be lower than they had been. The higher rates on the remaining bonds in the ladder help to maintain a higher overall yield on the total ladder.

A bond ladder can also help your clients structure a predictable cash flow stream. Individual bonds generally make interest payments twice per year. By looking at the months that various bonds distribute their interest, your client can spread the payments out over various months during the year, helping to ensure a regular stream of income.

When Do Bond Ladders Make Sense for Investors?

A properly constructed bond ladder can provide interest income at regular intervals that clients can depend on. This income is generated while the bond ladder helps minimize interest rate risk by holding the underlying bonds until maturity.

A bond ladder makes sense in situations where your client has the liquidity outside of the bond ladder to keep the ladder in place without having to sell off some of the rungs on the bond ladder early. This can expose them to depressed prices for the bonds in a period of rising interest rates such as the one we are currently experiencing.

A laddered bond portfolio can make sense for retirement as an example. A retired client might benefit from the regular income, you can then work with them to strategize on the reinvestment or redeployment of funds as rungs on the ladder mature.

How Much Income Can You Generate From a Bond Ladder?

The amount of income that can be generated from a bond ladder will depend on two main factors:

  • The total amount invested in the bond ladder
  • The coupon rates of the bonds in the ladder

The annual income is a function of these factors. For example, if the total par value of the bonds in the ladder is $200,000 with an average interest rate of 3.0%, then the annual income from the bond ladder would be $6,000.

This may change over time if the total value of the bonds in the ladder changes and also based on the current interest rates for new bonds added to the long end of the ladder as some bonds mature.

Are There Pitfalls or Downsides to Using a Bond Laddering Strategy?

While a bond ladder can be a solid strategy for all or a portion of a client’s fixed income allocation, there can still be some risks to using a bond ladder.

It’s important to build a bond ladder using high-quality bonds to avoid default risk. One pitfall is that your clients, or even in some cases advisors, may not have the capacity to thoroughly research the quality of various bond issuers.

Laddering just a few individual bonds can lead to a lack of diversification in this portion of your client’s portfolio. This can pose a risk of default in the case of corporate bonds.

The cost of trading individual bonds can be high. While individual bonds typically have a $1,000 par value, investors may need to buy a block of bonds from an issuer to get the best pricing on the trades.

What Is the Best Way to Build a Bond Ladder?

While there are no set in stone best practices for building a bond ladder, here are some things to keep in mind to help build a strong bond ladder for your clients.

Focus on high-quality bonds as much as possible. This means corporate and municipal bonds rated A or better, or Treasurys. With higher quality issues your client will need to hold bonds from a smaller number of issuers to adequately diversify against the risk of having one or more rungs on the ladder default, disrupting the ladder’s goal of delivering a stream of predictable income over time.

Be sure that you are able to hold all bonds until maturity. Clients need to keep this in mind when determining the length of the furthest rung on the ladder. This should be done in conjunction with the client’s various goals including funding college for their kids, retirement and other goals.

Holding the bonds to maturity helps minimize interest rate risk that could reduce the amount realized from a forced sale of one or more of the bonds in the ladder during a period of rising interest rates.

Avoid callable bonds. A favorable feature of a bond ladder is the predictability it provides in terms of receiving interest payments from the bonds on the various rungs of the ladder, as well as when the principal from each bond will be available for reinvestment or other uses if needed. When a bond is called, the interest payments stop and your client must have a plan for the cash they will be receiving.

Are There Tools That Can Help You Create a Bond Ladder?

There are some tools available to both individual investors and advisors that can assist in building a bond ladder. One such tool is offered by Fidelity Investments. The Fidelity tool does require users to log in, so presumably it is only available to individual investors with a Fidelity account or to advisors who custody assets there.

The Fidelity tool appears to be fairly comprehensive and thorough in its approach. However, the best resource for your clients for whom a bond ladder is appropriate is you as their advisor. Your advice to your clients is the best bond ladder “tool” for your clients.

ETF provider BlackRock offers a bond ladder tool on its sites for its iBonds ETFs. These ETFs offer portfolios of similar bonds all maturing in the same calendar year.

What Is an ETF Bond Ladder and How Do You Build One?

One way to build an ETF bond ladder is through the use of a series of ETFs that hold bonds that all mature in a specific year. BlackRock’s ishares ETFs offer several series of ETFs that are designed for bond ladders.

The ishares iBonds series of ETFs offers funds that hold Treasurys, municipal bonds, investment grade corporate bonds or high yield and income corporates, all of which mature within a given calendar year. The bond ladder tool on the site can help with building a bond ladder that fits your client’s needs.

While the ETF bond ladder is not as precise in terms of maturities and interest payment dates as a ladder composed of individual bonds, this approach can offer some advantages for your clients.

  • The ETFs offer a higher level of diversification than holding a small number of individual bonds.
  • ETFs are very liquid and transaction fees for trading them will be generally lower than for individual bond holdings.
  • Professional management over a portfolio of bonds of a similar type all maturing in a single year.


A bond ladder can be a solid option for some or all of your client’s fixed income allocation. A bond ladder helps to mitigate interest rate risk and can help provide a steady, predictable stream of income.

Bond ladders can be built with several different types of bonds including Treasurys, corporates, municipal bonds and others. Certain ETFs can be used to build a ladder as well. CD ladders are also common.

In guiding your client in building an appropriate bond ladder, you will want to advise them to use higher quality, non-callable bonds. You will also want to be sure that they can hold the bonds to maturity to reap the most benefit from this approach.


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