With bond laddering, you invest in multiple bonds with different maturities—which is designed to give you the predictable income you expect from bonds and the flexibility to reinvest your principal.
How a ladder works.
In the example above, you buy four bonds with staggered maturities. Your combined average annual yield is 2.125%.
2 Years From Today
In two years, when Bond A matures, you reinvest the proceeds in a new bond, extending your ladder. You can continue to do this as bonds mature in the future.
This hypothetical example is for illustrative purposes only. It cannot predict or project the return of any specific investments.
While predictable, bond income is not guaranteed and is subject to call risk as well as possible default on principal and interest (which increases with lower rated securities).
Schwab recommends purchasing a minimum of 10 securities for diversification.
How to build a ladder.
- Buy bonds (such as Treasuries, munis, or corporates) or CDs with staggered maturity dates.
- As each bond or CD matures, reinvest the principal in new bonds with the longest term you originally chose for your ladder.
- If interest rates move higher, you can reinvest at higher rates. If rates fall, you'll still have some bonds locked in for the longer term at higher yields.
- Be sure to consider the risks of investing; see more about
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. For further details, please feel free to contact a Schwab Fixed Income Specialist at 800-626-4600.
CDs from Schwab CD OneSource® are issued by FDIC-insured institutions and are subject to change and system access. Unlike mutual funds, certificates of deposit offer a fixed rate of return and are FDIC-insured. There may be costs associated with early redemption and possible market value adjustment.