{"id":4952,"date":"2014-10-22T05:44:26","date_gmt":"2014-10-22T12:44:26","guid":{"rendered":"http:\/\/staging-prblog.paladinregistry.com\/blog\/?p=4952"},"modified":"2014-10-22T05:44:26","modified_gmt":"2014-10-22T12:44:26","slug":"bond-ladder-ready-climb","status":"publish","type":"post","link":"https:\/\/www.paladinregistry.com\/blog\/investing\/bond-ladder-ready-climb\/","title":{"rendered":"The Bond Ladder Ready to Climb"},"content":{"rendered":"

\"bond<\/a>With bond yields stubbornly camped near historic lows, is there a way to invest in fixed income while limiting our exposure to rising interest rates?<\/strong>\u00a0 Yes.\u00a0 Bond ladders are a fairly simple approach to doing just that.\u00a0 Bond ladders work differently from bond funds because bonds have a component that bond funds do not- fixed maturity dates.\u00a0 In simple terms, if you hold a bond to maturity, you will receive the principal back no matter how interest rates have moved during the holding period.\u00a0 The value of a bond fund at the end of the same period may be higher or lower depending on how interest rates have changed.\u00a0 (Remember that bond prices fall when interest rates rise and vice versa.)\u00a0 Therefore, if rising rates are a major concern, individual bonds can be used to guard against loss of principal.<\/p>\n

A bond ladder is constructed by purchasing bonds<\/a> (or other income investments with maturity dates such as a CDs) in even intervals and dollar amounts extending out into the future.\u00a0 For example, if we have $100,000 to invest, we could purchase 5 bonds for $20,000 each maturing in 2015, 2016, 2017, 2018 and 2019.\u00a0 Under normal market conditions, bonds of similar credit quality would pay slightly more interest the further out their maturity dates.\u00a0 For simplicity sake, let\u2019s say that the 2015 bond pays 1%, 2016 pays 2%, and so on through 2019.\u00a0 The first year we would earn 3% on our ladder.\u00a0 Assuming steady interest rates, if we reinvest the principle each year back out at the 5-year point, after 4 years all of our bonds would be earning 5%.<\/p>\n

The increasing yield of the ladder over time is nice, but wouldn\u2019t we have earned more by just buying one 5-year bond that paid 5% or buying a fund holding bonds with an average maturity of 5 years?<\/strong> Yes, but only if rates hold steady or fall.\u00a0 What if rates rise?\u00a0 With the individual bond, we cannot reinvest the principal (or even have access to it) until it matures in 5 years without risking a loss by selling it at a lower price.\u00a0 The bond fund is even more vulnerable to rising rates.\u00a0<\/a> Since the fund\u2019s maturity is maintained at a 5 year average, a steady rise in rates continues to erode the value of the fund.\u00a0 There is no point in time that we can be certain of recovering our initial investment.<\/p>\n

Tell Us What You Think – Is a Bond Ladder an investment tool you’ve used?<\/strong><\/em> \u00a0<\/strong><\/p>\n

To learn more about Glen Martin, view his Paladin Registry profile<\/a><\/strong>.<\/strong> \u00a0<\/strong><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

With bond yields stubbornly camped near historic lows, is there a way to invest in fixed income while limiting our exposure to rising interest rates?\u00a0 Yes.\u00a0 Bond ladders are a fairly simple approach to doing just that.\u00a0 Bond ladders work differently from bond funds because bonds have a component that bond funds do not- fixed maturity dates.\u00a0 In simple terms, if you hold a bond to maturity, you will receive<\/p>\n","protected":false},"author":48,"featured_media":4956,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[395],"tags":[],"class_list":["post-4952","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing"],"yoast_head":"\nThe Bond Ladder Ready to Climb<\/title>\n<meta name=\"description\" content=\"A bond ladder is a fairly simple approach to invest in fixed income while limiting your exposure to rising interest rates. 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