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

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Finance Allah Shmoop What are serial bonds term bonds and

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staggered maturity Sze of bonds Well let's start with the

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serial bonds No not not that serial bonds Come do

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it Purposely measured durations like we dig you Tractor company

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needs to buy a new factory that'll cost one hundred

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million bucks They know that they're operating Profits will pay

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Hey back that hundred meal over time So they sell

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one hundred million dollars worth of cereal bonds to the

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public that come do serially in two years four years

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six years and eight years and then are fully retired

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a decade later where every two years ah lottery wheel

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spins and a traunch of those serial bonds is called

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they have effectively staggered the maturity of their bonds in

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having these serial bonds come due on different dates you

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know spread nicely apart like years apart Technically they could

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have also just offered five different series of bonds at

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twenty million bucks each which come do it different durations

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that would be directly staggering The maturity Sze of them

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Well why would you want to stagger The maturity is

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of bonds anyway because companies do much better refinancing or

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raising money in small amounts all the time over long

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periods of time rather than say having all fourteen billion

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dollars of some huge principal debt come do all that

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same week Should something go awry in the company be

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unable to either refinance that principle or pay it all

01:24

back Well then they end up here structurally Financial managers

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of companies embrace term bonds I'ii bonds that run for

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a certain term or time period and then they're callable

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or they mature or they convert into stock at a

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given price per share But simply while those bonds then

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don't at least come do all the same day and

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put the company at risk for the goal here is

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to stagger the maturity of bonds so that companies never

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feel illiquid or like they have a gun to their

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head to suddenly come up with a ton of cash

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to a snarling group of Wall Street bond investors who

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spell forgive this way

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