What is a bond ladder?

A bond ladder is where an investor invests in multiple bonds of different maturities so as to provide cash flows at regular points in time in the future. This can be done using coupon bonds or zero-coupon/discount bonds. The latter may be more tax-efficient because the pull-to-par is classed as a capital gain whereas coupons are classed as income. Bond ladders can be particularly helpful where the client has known liabilities or cash flow needs or just where the client wants to optimise for income. They are less appropriate for those seeking growth of capital. Where liabilities are explicitly defined or forecasted, a bond ladder can also introduce elements of duration-matching and immunisation, which are strategies that can protect the portfolio against drastic yield changes that can damage the value of the portfolio. This is a form of sequencing risk which can be overcome in part with an effective liability matching strategy.