Laddering Bonds or CDs

From Bogleheads

Jump to: navigation, search

Laddering is a technique of holding bonds or CDs of different maturity dates in a portfolio in order to balance high yield and liquidity.

With a normal yield curve, long-dated CDs have a higher yield than shorter-dated ones. However, long-dated CDs, by definition, lock your money into an illiquid holding. A ladder provides a way to take advantage of the highest-yielding CDs while improving liquidity of (access to) your money.

Typically, you create a ladder by splitting your money into 5 parts, and purchasing CDs of 1, 2, 3, 4, and 5 year duration. When the 1 year CD matures, you use the money to purchase a new 5 year CD. After 4 years, you have all of your money invested in 5 year CDs, but 1/5th of your money is available every year. As each CD matures, you can decide whether to reinvest it in all or in part.

If you want quicker access to your money, you can also set up a 1-year ladder, with rungs at 3, 6, 9, and 12 months.

Each time a CD matures, you can purchase the highest yielding new CD you can find (known as "riding the yield curve"). In a normal yield curve, that will be the longest dated one. But in an inverted yield curve, the shortest term CD may have a higher rate. You can even chase yields by moving your money to whatever bank is offering the best rate at that moment.

Laddering Versus Investing in a Bond Fund

Please see Individual Bonds vs a Bond Fund for a discussion of holding a ladder of bonds vs. a bond funds.

Links

How to Cite

You can link to this page from the Bogleheads Forum by copying and pasting the following text into your forum posting:

Please see [url=http://www.bogleheads.org/wiki/Laddering_Bonds_or_CDs]Laddering Bonds or CDs[/url] on the [url=http://www.bogleheads.org/wiki/Main_Page]Bogleheads Wiki[/url].
Notice something that needs correcting? Notify a wiki editor or become a wiki editor and fix it yourself!


Bonds
Bonds Treasury Inflation Protected Securities • I Savings Bonds • EE Savings Bonds • Corporate Bonds • Zero-coupon bond‎ • Mortgage Backed Securities • Municipal Bonds • Convertible Bonds • High Yield Bonds • Emerging Market Bonds
Bond Topics Bond Basics • Bonds: Advanced Topics • Laddering Bonds or CDs • Individual Bonds vs a Bond Fund • I Bonds vs TIPS
Research Resources Vanguard SEC Filings: Taxable Fixed Income Funds • Vanguard SEC Filings: Tax-Exempt Fixed Income Funds


Money Markets
Cash Investments Money Markets • Certificate of Deposit
Cash Strategies Placing Cash Needs in a Tax-Advantaged Account • Laddering Bonds or CDs
Vanguard Money Market Funds Vanguard Money Market Fund Asset Pricing Policy
Retrieved from "http://www.bogleheads.org/wiki/Laddering_Bonds_or_CDs"
Personal tools