Creating a bond ladder is a technique that many investment professionals will recommend. This type of investment strategy can provide you with a number of benefits for your portfolio. Here are the basics of creating a bond ladder and what you can gain by doing so.

What Is a Bond Ladder?

Essentially, a bond ladder is like having a portfolio that is full of different bonds. You invest a certain amount of money into bonds and each one of them is going to have a different maturity date and coupon rate. 

Benefits

By creating a bond ladder, you will be able to take advantage of a few benefits as an investor. First of all, you will be able to choose bonds that have different coupon payment dates. This will allow you to receive interest when you want to receive it. Many corporate bonds only pay interest once every six months. If you want to create a regular source of income for yourself, this would not be frequent enough. If you purchase several bonds, you can spread out the interest payments to once a month if you would like. This makes it easier to create a regular source of income for yourself if you want to do so.

Another reason that many people utilize a bond ladder is so that they can smooth out the impact of interest rate fluctuations. Whenever you invest in bonds, you have to realize that the value of your bond is going to go up and down depending on interest rate movements in the market. Whenever interest rates are high, the value of your bond is going to decrease. Whenever interest rates are low, your bond is suddenly going to increase in value. By using your investment dollars to purchase several different bonds, you will not be locking yourself into one particular bond investment. You will have several different bonds at different interest rates. This means that some of them are going to be appreciating in value while some of them are going to be depreciating in value with changes in the market. If you want to sell a bond to purchase a different bond, you can do so without taking a loss on the sale. 

How to Create a Bond Ladder

The first thing that you will need to do is determine how many bonds you need to purchase. You will need to take the total amount of money that you had to invest in bonds and divide that amount by the number of years that you want to use a bond ladder. This will tell you how many bonds that you need to purchase.

You will then need to look at the different information that is available with each type of bond. You will need to determine when the bond pays interest and when it matures.

You will also need to consider looking at bonds from different companies as well as government bonds. You might even want to include municipal bonds, CDs, or Treasuries. 

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