Takeaways
- Bonds are debt securities that make regular interest payments to investors.
- A bond ladder helps investors time their income and manage risk.
- Bond ladders can be short-term, intermediate, or long-term in structure.
- Bond ladders can vary in composition based on your ideal investment horizon.
- Bond ladders can help maximize investment returns or stabilize a portfolio.
What Is a Bond Ladder?
A bond ladder is an investment strategy for investing in bonds, which involves buying multiple bonds with varying or staggered maturity dates. The idea behind creating a bond ladder is to build a fixed-income portfolio where bonds mature at progressive intervals, like rungs on a ladder. A bond ladder is a popular strategy utilized by beginner investors and seasoned finance professionals. A bond ladder helps reduce and manage risk while creating a fixed-income stream.
You can tailor a bond ladder to align with specific investment goals and exacting time horizons. For instance, a bond ladder with more short-term bonds might be an ideal way to generate regular monthly income or have more cash readily available when you anticipate expenses. On the other hand, long-term bonds can be a great benefit if you have a longer investment time horizon or are aiming for higher returns over time. Additionally, you can sprinkle many types of bonds into your ladder.
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How a Bond Ladder Works
In a bond ladder, each rung consists of a bond (or series of bonds) with a specific maturity date. In your bond portfolio, you could have some bonds maturing in one year, some in three years, and others in five years. As time progresses and each bond matures, you will receive both the interest and principal, and this money can then be reinvested into additional bonds at current rates, which keeps the ladder going.
One of the biggest draws of incorporating a bond ladder into your portfolio is its inherent ability to balance risks with returns. By spacing out maturities, you capture varying degrees of interest rate returns (read more about Annual Percentage Yield). While this helps mitigate the risk from sudden interest rate fluctuations, it can also reduce the upside in your portfolio.
Another notable benefit of bond ladders is their ability to provide liquidity. Since bonds mature at a known date and interest rate, you can easily manage your cash flow. The certainty of cash flow can dissuade you from selling off assets during unfavorable market conditions.
The predictability of payments makes bond ladders especially attractive if you are looking for a strategy to build a steady income stream for retirement or for anyone who wants to remain as highly liquid as possible.
How to Create a Bond Ladder
While a bond ladder can be conceptually easy enough for a beginner investor to create, a bond ladder should be carefully curated to fit the exact risk profile, fixed income, and time horizon you are trying to achieve. This means thoughtful consideration for how each rung of your bond ladder is built, the timing of the investments, and the investments you choose.
Read More: How Much Money Should You Keep In Your Savings Account?
Number of Rungs
The number of rungs on your bond ladder is determined by your investing goals. If you are trying to optimize for a short-term income stream, you might think about having at least six rungs on your ladder. Because bonds pay interest every six months, you can stagger your bond investments to ensure interest payments occur monthly.
Timing of Investments
Your investment time horizon impacts how you should think about the timing of your bonds. The timing of your bond purchases, or spacing between rungs, should be determined by the maturities of the bonds you are buying. For maintenance purposes, investors usually try to space their purchases evenly. For example, you may purchase a bond every year. Generally speaking, bonds with longer maturities tend to offer higher yields.
Smart Tip:
Due to the highest interest rate increase in history, short-term bond yields are higher than long-term bond yields. Because of this, investors have created shorter bond ladders to capture the high-interest rates.
Types of Investments
You can purchase different bonds – corporate bonds, high-yield bonds, U.S. Treasury bonds – to help you construct your bond ladder. You can also consider municipal bonds if you are trying to optimize for taxes. However, most financial advisors will advocate for focusing on highly rated corporate bonds instead.
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3 Categories of Bond Ladder
Here are the three main buckets of bond ladders retail investors and institutional investors both create:
1. Short-Term Bond Ladders
In a short-term ladder, you buy bonds with near-term maturities, typically five years or less. This shorter time horizon is ideal for investors who prioritize liquidity and want to take advantage of changing interest rates more frequently. For example, you might build a short-term ladder with bonds maturing each year, and as the bonds mature, you use the capital for your needs or reinvestment your earnings to a new rung on the ladder.
Best For: Maximizing short-term bond yields.
Investor Type: Short-term fixed-income investors
Investments: High-Yield Savings Accounts, High-Yield Bonds, Certificates of Deposits, U.S. Treasury Bills
2. Intermediate-Term Bond Ladders
Another category of bond ladder is the intermediate-term bond ladder. These ladders typically have maturities ranging from five to ten years. This ladder balances higher interest rates offered by longer maturities and the increased liquidity of shorter-term bonds. Intermediate-term bond ladders are a popular choice for investors looking for a blend of stability, predictable income, and investment horizon.
Best For: Hedging short and long-term risk.
Investor Type: Risk-conscious Investors
Investments: Certificates of Deposits, Corporate Bonds, U.S. Treasury Notes, U.S. Treasury Bonds
3. Long-Term Bond Ladders
When you set up a long-term bond ladder, you will look at a more extended period of at least ten to 30 years. Investors often find that long-term bond ladders are where they can find higher interest rates because they are willing to commit capital for longer periods. These are ideal for funding retirement plans or other situations where access to capital is not as important as the potential for higher yields and more stability.
Best For: Locking in long-term rates.
Investor Type: Long-term-oriented investors
Investments: U.S. Treasury Notes, U.S. Treasury Bonds, Municipal Bonds
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Advantages of a Bond Ladder
There are significant advantages to setting up one or more bond ladders:
- Income Stability: As bonds at various rungs of the ladder mature at different times, they provide regular returns. Interest income increases your passive income.
- Risk Diversification: Since the bonds in a ladder have different maturity dates, you are not exposed to the risk of interest rates changing uniformly across your entire portfolio.
- Greater Flexibility and Control: Tailor your ladder to match your specific financial goals, risk tolerance, and cash flow needs. Whether you adjust the length of maturities or the types of bonds included, the choice is yours.
- Hedging Against Inflation: You can potentially offset the effects of inflation by regularly reinvesting in new bonds at current market rates. (Read more about investing in Treasury Inflation-Protected Securities).
- Tax Advantages: Municipal bonds are often exempt from federal taxes and, in some cases, state and local taxes.[1] Investors can create a tax-efficient income stream by including these bonds in a ladder. (Read more about how to file your taxes.)
Smart Summary
Creating a bond ladder can be an essential part of your investing strategy. If you are concentrating on building a fixed-income portfolio to boost your passive income or ensure a monthly income stream, this strategy could be a wonderful fit. Bond ladders help supplement your existing income or give you a predictable income stream for retirement planning. Either way, bond ladders can add predictable cash flow to your financial planning and offer diversification to your portfolio.
(1) Internal Revenue Service. Tax Exempt Bonds. Last Accessed October 20, 2025.
