|
What is a Yield Curve?
|
||||||
 |
||||||
|
A yield curve is drawn by plotting the yield of a T-bill, Note, or Bond vs the length of its maturity. The above graph shows a yield curve from February 05 when the yield curve was 'positive' meaning as the time to maturity grew longer, the yield or rate of return was greater. |
||||||
|
What is a Bond Ladder?
|
||||||
| If one chose to put all of their bond allocation into one maturity, there would be a risk that if rates increased, their bonds would drop in value. A bond ladder can help reduce this risk. Simply stated, a bond ladder divides one's bond or fixed income investments into a number of maturities, ranging from 4 to 10 or more depending on the dollar amount invested. From the above curve, one might decide to put $10K into each of 1yr, 3yr, 5 yr, and 7 yr bonds. When the 1yr matures, it's replaced with another 7 yr bond. Over time, all 4 bonds will have a yield close to the 7 yr rate on the curve. | ||||||