Bond ladders

Never heard of bond ladders?

Well neither had I until a few months back. I was running some tests on a sample bond portfolio and discovered a seeming paradox:

A portfolio that is long bonds may actually benefit from a sell off!

The explanation is that you benefit when you reinvest the coupons that your portfolio pays: the bonds you buy are cheaper.

This is a problem of reinvestment risk, and the concept of a bond ladder should be better known as a standard building block for a bond portfolio – it is one way to reduce reinvestment risk.

Here are some articles that give more details: here and here.

Here is an abstract of a more academic pay-per-view paper which discusses bond ladders as a nearly optimal investment strategy.


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