Laddering
Categories: Financial Theory, Bonds
See: Sequence Risk.
Ladders have rungs. You step on them sequentially, to get to the next level. Think about your retirement. You don't know how long you're gonna live. A lifetime of wild partying has left you with a volatile ticker. So you can't afford the risk of owning stocks. Instead, you own a ton of muni bonds, but you want them to come due in blops of $25,000 every 2 months so that you have plenty of dough to send yourself out in style.
You want them laddered, regular, not in one fell swoop, so that you could potentially spend everything in a few months and end up old, destitute in a retirement home, and dreading every day remaining. Each rung on that ladder of laddering is the due date and subsequent wiring of cash money from those muni bonds into your Schwab account. So then, 6 times a year, you get a tax-free blop of 25k and you can go spend it, climbing one rung higher into that great party cloud in the sky.
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Finance: What are serial bonds, term bon...5 Views
Finance Allah Shmoop What are serial bonds term bonds and
staggered maturity Sze of bonds Well let's start with the
serial bonds No not not that serial bonds Come do
it Purposely measured durations like we dig you Tractor company
needs to buy a new factory that'll cost one hundred
million bucks They know that they're operating Profits will pay
Hey back that hundred meal over time So they sell
one hundred million dollars worth of cereal bonds to the
public that come do serially in two years four years
six years and eight years and then are fully retired
a decade later where every two years ah lottery wheel
spins and a traunch of those serial bonds is called
they have effectively staggered the maturity of their bonds in
having these serial bonds come due on different dates you
know spread nicely apart like years apart Technically they could
have also just offered five different series of bonds at
twenty million bucks each which come do it different durations
that would be directly staggering The maturity Sze of them
Well why would you want to stagger The maturity is
of bonds anyway because companies do much better refinancing or
raising money in small amounts all the time over long
periods of time rather than say having all fourteen billion
dollars of some huge principal debt come do all that
same week Should something go awry in the company be
unable to either refinance that principle or pay it all
back Well then they end up here structurally Financial managers
of companies embrace term bonds I'ii bonds that run for
a certain term or time period and then they're callable
or they mature or they convert into stock at a
given price per share But simply while those bonds then
don't at least come do all the same day and
put the company at risk for the goal here is
to stagger the maturity of bonds so that companies never
feel illiquid or like they have a gun to their
head to suddenly come up with a ton of cash
to a snarling group of Wall Street bond investors who
spell forgive this way