Taking Advantage of Rising Interest Rates with a Bond or CD Ladder
What is a bond or CD Ladder
- A ladder is a strategy that staggers the maturity dates of individual bonds and certificates of deposits (CDs) in order to provide you with frequent access to portions of your principle and help you manage reinvestment risk.
How does a ladder typically work?
- Let's say you have $300,000 to invest in individual bonds. To build a bond ladder, you might invest $100,000 in bonds that mature in one year, $100,000 in bonds that mature in two years, and $100,000 in bonds that mature in three years. When the first group of bonds mature, the proceeds are typically reinvested in bonds with the longest maturity, which in this example is three years. By following this pattern of reinvestment, a portion of your bonds will mature every year for as long as you continue to use the laddering strategy.
What are the benefits of laddering your investments?
- Laddering can help you take advantage of rising interest rates by providing you with access to a portion of your principle at regular intervals so that you have the opportunity to reinvest it in bonds or CDs paying higher rates. If interest rates decline, laddering can also help you manage reinvestment risk- the risk that comparable investments will be paying interest at a lower rate when your investments mature. For example, if all of your bonds mature at the same time and rates decline, you'll be faced with either accepting less income if you reinvest in comparable investments or shooting for equal or higher income by choosing riskier investments. If your investments mature at different times, however, those investments that are not currently maturing will continue to generate income at the same rate as before, so that your overall income may not decrease as much.
PLEASE NOTE: When interest rates rise, bond prices generally fall, and vice versa. The effect is usually more pronounced for longer-term securities. You may have a gain or a loss if you sell a bond prior to its maturity date. Fixed-income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Please consult your financial advisor for help in developing and implementing an investment plan.
Taking the time to find the right investment plan is essential when dealing with your finances. Copper Leaf Financials' team of experienced planners will help you develop and implement an investment plan suited to you and your best interest. For more information call 802-878-2731