A portfolio that is constructed by purchasing a series of fixed-income securities (e.g., bonds) with “laddered” (i.e., far to further to furthest) maturities (e.g., two, four, six and eight years). As each security matures, its proceeds are reinvested in a new security at the furthest end of the maturity ladder. The new addition often has the highest yield within the defined maturity range. A laddered portfolio can be used to hedge interest rate fluctuations as it secures a source of liquidity with the short-term securities while at the same time providing a relatively steady cash flows for ladder extension.
In an environment of rising interest rates, the proceeds from maturing securities (i.e., the principal paid back) can be reinvested at higher rates. However, if rates are on a decreasing trajectory, the proceeds will be reinvested at lower rates (only for the maturing components) but the interest rates for remaining securities (on the maturity ladder) will still be generating higher yields, possibly stabilizing the portfolio’s income over the course of the entire period.
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