bond ladder
Bond Ladder is a way of buying bonds with different maturity dates so your money keeps coming due in stages, not all at once.
In plain English
What do you do with money you want to grow but might also need to touch in bits over the next few years, not all today, not all in ten years?
That question is exactly what a bond ladder answers. Instead of putting all your money into one bond that matures in, say, five years, you spread it across bonds that mature in one year, two years, three years, four years and five years. Each year, one bond matures and hands you back cash. You can spend it, or you can buy a new five year bond with it, which keeps the ladder going.
Think of a Nigerian who has ₦5,000,000 and buys FGN savings bonds or treasury bonds spread across different tenors instead of dumping everything into a single three year bond. Every year, a chunk matures. If interest rates have gone up that year, she reinvests at the new, better rate. If rates have dropped, only that one rung is affected, not her whole pile.
In the United Kingdom, someone nearing retirement might build a ladder of gilts maturing in successive years, timed to land just when they will need income, rather than guessing where interest rates will be and betting everything on one bond.
For a Nigerian abroad sending money home for a parent's upkeep, a small ladder of local bonds can work like a set of scheduled allowances that arrive on their own, without anyone needing to remember to withdraw and reinvest a lump sum every time.
The real gift of a bond ladder is that it takes the guessing game out of interest rates. You are never fully locked in at one rate, and you are never left needing cash with nothing maturing that month.
Chidinma has ₦4,000,000. She splits it into four ₦1,000,000 bonds maturing in one, two, three and four years, each paying a fixed rate. Every year, one bond pays out, and she reinvests it into a new four year bond, so the ladder keeps refreshing itself.
Questions people ask
Do I need a lot of money to start a bond ladder?
No. You can start small, even with two or three bonds of different maturities, and add more rungs as you save. The idea matters more than the size.
What is the main benefit over just buying one long bond?
Flexibility. With one long bond, your money is stuck until it matures. With a ladder, some part of your money is always about to become free, so you can adjust to new interest rates or unexpected expenses.
Can I build a bond ladder with Nigerian government bonds?
Yes. FGN bonds and treasury bills of different tenors are commonly used to build ladders locally, and savings bonds in particular are accessible to everyday investors.
Last reviewed