A bond ladder is a bond investing strategy that attempts to reduce risks associated with fixed-income securities while managing cash flows for the individual investor. Under this strategy investor does not purchase one bond but he purchases 4 to 5 bonds of different maturities. So if an investor has $80000 than he will buy 4 bonds of $20000 rather than buying only 1 bond of $80000.
By adopting bond ladder strategy investor can control as well as adjust the cash flow according to his requirements. Suppose investor needs $20000 after 1 year then he will buy $20000 bond of 1 year maturity and invest rest $60000 in long term bonds which he cannot when he buy only 1 bond of $80000. Another advantage of bond ladder is that it smoothens out the fluctuations of interest rates because you have a bond maturing every year or at regular intervals.
One can create bond ladder wither by dividing the total amount in equal parts as explained in the above example or according to the maturities like investing $30000 in 1st year then $20000 in 2nd year and so on according to the investors preference.
Hence from the above one can say that bond laddering strategy is a very useful approach for those investors who want to manage their cash flows effectively and at the same time reducing interest rate risks arising due to fluctuations in interest rates.
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