Bond ladder

A bond ladder spreads money across bonds, or fixed-maturity bond funds, that mature at staggered dates, for example one each year for the next five or ten years. Each bond is a rung. When the shortest rung matures, the investor either spends the money or reinvests it at the long end of the ladder, keeping the structure going. Individual government bonds are commonly used because their credit risk is low, which leaves the main uncertainty as the interest rate available when each rung is reinvested.

Laddering does two jobs. It matches known future spending, such as retirement income or school fees, with bonds that pay out when the money is needed, so interim price swings matter less if each bond is held to maturity. It also averages out interest rate risk: rather than betting everything on today's rates, the investor reinvests a portion at whatever rates prevail each year. The trade-offs are effort, dealing costs and the need for enough money to buy several separate bonds. An ordinary bond fund does not behave the same way, because it never matures.