How to use the bond ladder calculator
The calculator opens with a five-rung example: $100,000 spread across bonds maturing in years one to five, with yields read from an example yield curve. Replace the inputs with your own plan.
- Total amount. The money you want to ladder. It is split equally across the rungs, so each rung gets the same principal.
- Number of rungs, first maturity and spacing. Five rungs, a first maturity of one year and one-year spacing gives maturities in years 1, 2, 3, 4 and 5. Ten rungs spaced two years apart starting in year two would run from year 2 to year 20.
- Yields. Either enter a yield curve (a few maturities and the yield for each, taken from current Treasury or CD quotes) and the calculator reads off the yield for each rung, or enter one yield and a slope in basis points per year of maturity. The curve in the example is illustrative, not today’s market.
- What happens at maturity. Reinvest at the long end puts each maturing rung into a new bond at the far end of the ladder, so the ladder keeps its length. Take the cash lets the ladder run down. For reinvestment you can set the yield you expect to get; leave it empty to assume today’s yield for that maturity.
- Years to show sets the length of the cash flow chart and the yearly table.
The chart stacks interest and maturing principal for each year, and the two tables list every rung and every year.
How the ladder is calculated
Each rung receives an equal share of the money and is assumed to be bought at par, so its yield is also its coupon rate:
Annual income = Σ P × yi
Weighted average yield = Σ P × yi ÷ Total
Weighted average maturity = Σ P × mi ÷ TotalN is the number of rungs, yi the yield of rung i and mi its maturity in years. With equal amounts in every rung, the weighted averages are simple averages.
When a rung matures in the reinvestment plan, its principal buys a new bond that matures one spacing after the current longest rung. That new bond always has a term of N × spacing years, which keeps the ladder’s shape:
Market value change for a yield rise of Δy = Σ P × [Price(yi + Δy, mi) ÷ 100 − 1]Price(y, m) is the price per 100 of face value of a bond with coupon yi, priced to yield y with m years left, using annual coupons.
A worked example
You ladder $100,000 across 5 rungs, maturing every year from year 1 to year 5. Each rung gets $20,000.00.
Reading the example yield curve, the rungs yield from 3.80% for one year to 4.10% for five. The first year’s income is $3,930.00, a weighted average yield of 3.93% on an average maturity of 3.0 years.
At the end of year 1 the first rung matures and is reinvested in a 5-year bond at 4.10%, lifting income to $3,990.00 in year 2. Once every original rung has rolled over, income settles at $4,100.00 a year. Over ten years the ladder pays $40,640.00 of interest.
If you take the cash instead, the ladder pays $11,940.00 of interest and returns your $100,000 in five installments of $20,000.00.
Why ladder instead of buying one maturity
A ladder is a compromise between the two simple choices: putting everything in short bonds or everything in long ones. With the example curve:
| Choice | Income in year 1 | Value change if yields rise 1 point |
|---|---|---|
| Everything in the 5-year bond | $4,100.00 | -$4,317.53 |
| The five-rung ladder | $3,930.00 | -$2,681.88 |
| Everything in the 1-year bond | $3,800.00 | -$954.20 |
The long bond pays the most when the curve slopes upward but carries the most price risk. The short bond hardly moves in price, but all of the money must be reinvested next year at an unknown rate. The ladder gives up some yield against the long bond in exchange for two things: a smaller price swing, and reinvestment spread over five dates instead of concentrated on one.
That second point is the real reason ladders exist. A ladder does not need a rate forecast: if rates rise, the rung maturing each year is reinvested at the higher rate; if they fall, only one-fifth of the money is exposed at a time and the longer rungs keep earning the old, higher yields.
Reinvestment rates change the income, not the plan
The rate you will get when each rung matures is the biggest unknown in a ladder. Changing the reinvestment yield in the example shows how much it matters:
| Reinvestment yield | Interest over 10 years | Income in year 10 |
|---|---|---|
| 3% (rates fall) | $32,940.00 | $3,000.00 |
| 4.10% (today’s 5-year yield) | $40,640.00 | $4,100.00 |
| 5% (rates rise) | $46,940.00 | $5,000.00 |
The first years change little, because most of the money is still in the original bonds; the gap opens as more of the ladder rolls over. A ladder turns interest rate risk from a single bet into a gradual drift you can plan around.
Choosing the length and the number of rungs
A longer ladder earns more on an upward-sloping curve: ten one-year rungs in the example pay $4,112.50 in the first year against $3,930.00 for five, and income settles at $4,400.00 once everything has rolled into 10-year bonds. The cost is a larger price swing, -$4,514.89 for a 1-point rise in yields, and money tied up for longer. On a flat curve the extra length earns nothing: with every rung at 4%, the five-rung ladder pays $4,000.00 in the first year, the same as one bond would.
Match the ladder to when you will need the money. A retiree covering the next decade of spending might hold ten one-year rungs and spend each as it matures, the pattern the Take the cash plan shows.
Building blocks: CDs, Treasuries and laddered ETFs
- Treasury bills, notes and bonds cover maturities from a few weeks to 30 years. They can be bought at auction or on the secondary market and sold before maturity if needed. Their interest is subject to federal income tax but exempt from state and local tax in the US.
- Bank and brokered CDs often pay competitive rates and are FDIC insured within the coverage limits. Bank CDs usually charge a penalty for early withdrawal; brokered CDs can be sold, but only at the market price.
- Corporate and municipal bonds can add yield or tax advantages, but each rung then carries credit risk, and our credit spread calculator shows what the extra yield implies. Diversifying within each rung matters more here.
- Defined-maturity bond ETFs hold a basket of bonds that all mature in the same year and pay out when the fund closes. A set of them with consecutive end dates works like a ladder with built-in diversification, at the cost of a fund fee.
To price an individual rung or check the yield you are being quoted, use the bond price calculator and the bond yield calculator. The bond duration calculator measures each rung’s interest rate sensitivity in more detail.
What this calculator does not include
- Prices other than par. Each rung is assumed to cost its face value and to pay its yield as an annual coupon. Bonds bought at a premium or discount have a coupon that differs from their yield, so the cash income will differ even though the yield is the same.
- Semiannual payment timing. Most Treasuries and corporate bonds pay twice a year. The yearly totals are about the same; the timing within the year is not shown.
- Reinvesting interest. Interest is treated as spent. Only maturing principal is reinvested.
- Taxes, fees and bid-ask spreads, which reduce the net yield, especially on small purchases of individual bonds.
- Defaults and calls. A callable bond can be repaid early when rates fall, and a corporate issuer can default. Both would break the schedule shown here.