What is a bond ladder?

Hi

I have seen this term mentioned a couple of times in various posts but don’t really understand what it is / how it works. It would be great if someone could explain it a bit?

Thanks
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  • MallyGirl
    MallyGirl Posts: 7,149 Senior Ambassador
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    On day 1 you buy a 1 yr fixed product, a 2 yr, a 3 yr, etc. As each one matures you invest the returned funds in a 3 yr (or 5 yr if it is better interest) soon a few short years you have all your cash in longer term fixed rate but some of it is released each year
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  • Linton
    Linton Posts: 18,049 Forumite
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    You have £10000. You put £2k into each of a 1 year, 2 year,,,5 year savings accounts at the best rate of interest you can find. After the first year when the first account matures you put the money into a new 5 year account. So after 4 years all your money is held in the best 5 year accounts you could find at the time but you get access to some of the money every year. If interest rates rise you can begin to take advantage within 1 year rather than having to wait for up to 5.
  • Paul_Herring
    Paul_Herring Posts: 7,481 Forumite
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    edited 27 December 2018 at 9:31PM
    The 'ladder' is basically where you end up with 'term' savings accounts maturing on a regular basis (either to be reinvested, or not.)

    The 'bond' is simply the savings vehicle used to set up a particular ladder.


    9 years or so back, when Fixed Rate Savings had decent interest rates (~5%) and were available in 3 & 6 month varieties, and a similar concept was around then, I wrote this, which explained how to set up a ladder that would end up maturing every month, within about 3 months if you had the capital ready, a bit longer if not.
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  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
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    I wrote this, which explained how to set up a ladder that would end up maturing every month

    Some people have mastered the art of doing something similar with regular savers: I think of it as a "merry-go-round" rather than a ladder but it's essentially the same trick. One advantage is that regular savers currently pay far higher interest, and some offer useful flexibility in an emergency. It's particularly easy for a couple to set up a successful "merry-go-round" because each needs to find only six different attractive regular savers.

    I guess that some people might do something similar with notice accounts.
    Free the dunston one next time too.
  • TBC15
    TBC15 Posts: 1,493 Forumite
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    What sort of returns could you expect at the moment?
  • k6chris
    k6chris Posts: 775 Forumite
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    Linton wrote: »
    You have £10000. You put £2k into each of a 1 year, 2 year,,,5 year savings accounts at the best rate of interest you can find. After the first year when the first account matures you put the money into a new 5 year account. So after 4 years all your money is held in the best 5 year accounts you could find at the time but you get access to some of the money every year. If interest rates rise you can begin to take advantage within 1 year rather than having to wait for up to 5.


    So once it is established, every year you have a 5-year saving account maturing, which you can then invest in another 5 year savings account...... I guess the implication is you don't reinvest everything but perhaps draw an element down to live off??
    "For every complicated problem, there is always a simple, wrong answer"
  • k6chris wrote: »
    I guess the implication is you don't reinvest everything but perhaps draw an element down to live off??

    Not necessarily, it all depends on the reasons for having the ladder to begin with.

    The example I used in my explanation at the link I posted earlier was for somewhere to put your 'emergency money' - money you don't necessarily need, but may need access to some of it at short notice.

    Also: https://investinganswers.com/financial-dictionary/bonds/bond-ladder-2582
    There are several advantages to bond laddering, and many bond fund managers use this strategy. The first advantage is that bond laddering can allow investors to benefit from increases in interest rates because the investor is able to reinvest the maturing portion of his or her capital at market rates. Second, the diversification inherent in laddering can help stabilize the investor's income stream. Third, laddering gives the investor liquidity because a portion of the portfolio is never more than a year away from maturity.
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  • Thanks everyone, really helpful
  • redpete
    redpete Posts: 4,721 Forumite
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    TBC15 wrote: »
    What sort of returns could you expect at the moment?

    Really easy to find out here.

    with a summary:

    Masthaven – 1.9% for 9mths
    New. Raisin – 2.1% for 1yr + poss £10-£100
    Atom Bank – 2.05% for 1yr
    Investec - 2.35% for 2yrs
    Atom Bank – 2.4% for 3yrs
    Atom Bank - 2.7% for 5 yrs
    loose does not rhyme with choose but lose does and is the word you meant to write.
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