Yavapai Financial Planning LLC

NEWS & RESOURCES

FIXED INCOME LADDER

A fixed income ladder spreads your fixed income investments over different maturities. For example, if you had $150,000 to invest in fixed income securities, you might have $50,000 mature in one year, $50,000 in two years and the final amount, $50,000 would mature in three years.

Normally the longer maturity would have the higher interest rate but many factors influence the rate. If you were to invest all your money in a three year maturity security and the interest rates go up after you invested, the value of your investments would go down. A ladder spreads out this interest rate risk.

A ladder set up june 2006 might look like this:

$50,000 invested in a cd maturing 6/30/07 at 4.75%

$50,000 invested in a cd maturing 6/30/08 at 5.00%

$50,000 invested in a cd maturing 6/30/09 at 5.25%

When the first cd matures, it is reinvested at the current rate to mature 6/30/10. If rates have gone up the investment would have the advantage of the newer rate. If funds are needed for non investment purposes, 1/3 of the total investment could be withdrawn after only one year without penalty. A ladder protects against having all your money invested at low rates for a long period of time when rates are rapidly moving up as has recently occurred.