Bond Ladder

How a ladder works

Instead of putting everything into one bond or one GIC term, you divide the money into equal parts, the rungs, and stagger the maturities: one part maturing in 1 year, one in 2, and so on out to 5. When the shortest rung matures, you reinvest it at the long end of the ladder, at whatever rates prevail that day.

After a few rolls, every dollar is invested at the long maturities, which usually pay the most, yet something still matures every year. From then on, the only decision is the roll, and the answer is always the same.

The three problems laddering solves

A ladder is one structure answering three problems at once.

• Rate-guessing. You never bet the whole sum on the rate available on one day. If rates are higher next year, the maturing rung catches them; if they fall, the rest of the ladder is still locked in at the older, higher rates.
• Reinvestment risk. Only a fraction of the money ever renews at once, so a bad year for rates touches one rung, not the whole portfolio.
• Liquidity cadence. A rung comes due every year, penalty-free, ready to spend, rebalance, or roll.

GICs, bonds, or target-maturity ETFs

In Canada the most common implementation by far is the GIC ladder: five equal GICs with terms of 1 through 5 years, the maturing one rolled into a new 5-year each year. The structure and payoff are identical to a bond ladder, with deposit insurance standing in for market pricing, and it is the classic strategy the GIC entry describes.

With individual bonds, each rung is a bond held to maturity, so the yield to maturity you buy is the return you get, whatever prices do in between. Target-maturity bond ETFs, which hold a basket of bonds all maturing in the same calendar year, let you build the same ladder with one ticket per rung. For the shortest rung, a treasury bill does the job.

Building one: three rules

Equal rungs, so no single maturity dominates the average. Roll discipline: each maturing rung goes into a new long rung without second-guessing where rates are headed, because the refusal to guess is the strategy. And match the ladder to your horizon: a 5-year ladder suits money you may start drawing within about five years, not money you know you will spend sooner.

When not to ladder

If the money is needed on one known date, skip the ladder: a single maturity chosen to land on that date is simpler and usually pays more than the ladder's blended rate. Laddering money needed in exactly 3 years just dilutes the 3-year rate for no benefit.

At the other extreme, a decades-long horizon makes a ladder the wrong tool: it preserves capital and smooths rates, it does not grow wealth. Over decades, equities and broad bond funds do the heavy lifting; keep the ladder for the safe, dated slice of a plan.