A bond ladder divides money among bonds that mature at different times. As each rung matures, the investor can spend the cash or reinvest it at then-current rates.
The structure reduces one timing decision
Putting everything into one maturity concentrates reinvestment at a single future rate. A ladder spreads that exposure across dates.
It does not eliminate interest-rate or credit risk.
Individual bonds and funds behave differently
An individual bond has a stated maturity and payment schedule, subject to default and call provisions. A typical bond fund continually replaces holdings and has no single date when the investor receives face value.
The choice depends on the job assigned to the money.
Liquidity still matters
Selling a bond before maturity can produce a gain or loss. Money needed on an uncertain date may belong in a more flexible cash vehicle.
A ladder works best when its dates match actual needs.
Sources
- U.S. Securities and Exchange Commission, Investor Bulletin: Corporate Bonds.
- FINRA, Bond Laddering.