What is the purpose of laddering bond maturities when interest rates are expected to rise?

• A. Create longer duration
• B. Ladder bond maturities
• C. Buy longer bonds
• D. Hold cash

Answer: (B)

Spread maturities across a bond ladder to manage reinvestment risk when rates are rising. By placing money into bonds that mature at different times, you get cash back at regular intervals. When a rung matures, you can reinvest at the current, higher rates, rather than locking everything into a single, long-term maturity at today’s lower rate. This approach also dampens price volatility because not all of the portfolio is exposed to rate hikes at once, while still preserving some longer-term holdings for yield. Compared with alternatives, simply creating longer duration would lock in value sensitivity to rising rates and could hurt if rates rise quickly, buying longer bonds misses the reinvestment opportunities, and holding cash sacrifices potential higher yields.