Build A Hedge Against Inflation Using Bond Ladders

In a bond ladder, the bonds' maturity dates are evenly spaced across several months or several years so that the bonds are maturing and the proceeds are being reinvested at regular intervals. Bond maturities, in a ladder, that are closer together provide more liquidity for an investor.

ond-ladder-imageIf you are considering investing in bonds, but want a simple hedge against interest rate fluctuations, then you may want to consider building a bond ladder. When you buy bonds with a range of maturities, you may reduce your portfolio's sensitivity to interest rate risk. If, for example, you invested only in short-term securities, the kind least sensitive to changing interest rates, you may have a high degree of stability, but you may also be giving up yield. Conversely, investing only in long-term securities may result in greater returns, but their prices may be more volatile, possibly exposing you to losses should you have to sell before maturity. One of the primary benefits of bond laddering is that it is intended to cushion your portfolio from interest rate swings and keep you from having to guess which way rates are going and how fast.

Building a laddered portfolio involves buying an assortment of bonds with maturities distributed over time. For example, you might invest equal amounts in securities maturing in two, four, six, eight and 10 years. In two years, when the first bonds mature, you would reinvest the money in a 10-year maturity, maintaining the ladder. Your return would likely be higher than if you bought only short-term issues. Your risk would likely be less than if you bought only long-term issues. You would be better protected against interest rate changes than with bonds of a single maturity.

If interest rates fell, you'd have to reinvest the securities maturing in two years at a lower rate, but you'd have the above-market return from the other issues. If rates rose, your total portfolio would pay a below-market return, but you could start correcting that in two years or less when your shortest issue matured.

A ladder is intended to generate more income than a money market investment, yet may provide the opportunity to benefit from future interest rate increases as bonds mature and funds are reinvested.

While no one can control the direction of rates, investors may not want to remain waiting on the sidelines, which we have learned can be very costly. Furthermore, a portfolio that is properly diversified among asset classes helps to reduce overall portfolio risk.

Internote Taxable Corporate Bond Programs Notes are original issue, high grade, corporate bonds issued weekly and sold to individuals with as little as $1,000.

Selection & Flexibility Each week, offerings of Notes will include varying maturities, coupon rates and interest payment schedules. This provides maximum flexibility for different investment objectives.

Time & Availability New rates and offerings are set each week, and in most cases these rates are fixed until the following week. The price (par) and coupon remain constant throughout the period, allowing individual investors time to make an informed decision.

Pricing and Accrued Interest New issues of Notes are available at par (usually $1000 per bond). This means no discount or premium pricing, and no accrued interest. Also, when held to maturity, purchases of new issue InterNotes will not incur capital gains or losses.

Survivor's Option The Notes contain a Survivor's Option which allows the holder's estate to return (or “put”) the bonds back to the issuer at par. This feature is at the option of the estate.

For More Information
Please call Chris Myer, Senior Vice President - Fixed Income Investments, at 800-872-6864.