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Individual Bond Strategies
Ladders, barbells, and bullets are strategies for timing your bond investments, both when you buy them and when they mature. These strategies can help cushion your investments from interest rate fluctuations.
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Ladders: Bonds mature at different times and you continually reinvest them.
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Barbells: Sets of bonds mature in the long term and short term, but not the mid term.
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Bullets: Bonds, invested at different times, have the same target maturity date.
Ladders
Ladders are a popular strategy for staggering the maturity of your bond investments and for setting up a schedule for reinvesting them as they mature. A ladder can help you reap the typically higher coupon rates of longer-term investments, while allowing you to reinvest a portion of your funds every few years.
Build a Ladder Using Individual Bonds.
Example: Ladder strategy
You buy three bonds with different maturity dates: two years, four years, and six years. As each bond matures, you have the option of buying another bond to keep the ladder going. In this example, you buy 10-year bonds. Longer-term bonds typically offer higher interest rates.
Ladders are popular among investors who want bonds as part of a long-term investment objective, such as saving for college tuition, or seeking additional predictable income for retirement planning.
Ladders have several potential advantages:
�E The periodic return of principal provides the investor with additional income beyond the set interest payments
�E The income derived from principal and interest payments can either be directed back into the ladder if interest rates are relatively high or invested elsewhere if they are relatively low
�E Interest rate volatility is reduced because the investor now determines the best investment option every few years, as each bond matures
�E Investors should be aware that laddering can require commitment of assets over time, and return of principal at time of redemption is not guaranteed
Barbells
Barbells are a strategy for buying short-term and long-term bonds, but not intermediate-term bonds. The long-term end of the barbell allows you to lock into attractive long-term interest rates, while the short-term end insures that you will have the opportunity to invest elsewhere if the bond market takes a downturn.
Example: Barbell strategy
You see appealing long-term interest rates, so you buy two long-term bonds. You also buy two short-term bonds. When the short-term bonds mature, you receive the principal and have the opportunity to reinvest it.
Bullets
Bullets are a strategy for having several bonds mature at the same time and minimizing the interest rate risk by staggering when you buy the bonds. This is useful when you know that you will need the proceeds from the bonds at a specific time, such as when a child begins college.
Example: Bullet strategy
You want all bonds to mature in 10 years, but want to stagger the investment to reduce the interest rate risk. You buy the bonds over four years.
Test Yourself
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1.You are ready to purchase $20,000 of bonds. Interest rates for 10-year bonds are relatively high. But you want the ability to reinvest a portion after two years. Which strategy seems appropriate and what would you do?
See the answer.
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2.You are interested in investing $25,000 in bonds for the long term. How could you create a ladder such that $5,000 of bonds mature every two years so you can reinvest the funds?
See the answer.
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3.You are saving for retirement and want to invest $30,000 in bonds. You want all the bonds to mature ten years from now, in time for when you begin retirement. But you want to reduce the interest rate risk. Which strategy seems appropriate and what would you do?
See the answer.
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4.You are interested in setting up a ladder for your bond investments, but don't want to buy all of your initial bonds at once. What can you do?
See the answer.