You might have heard of fixed income ladders before, but what exactly are they, and why do you use them?  Well, you've come to the right place!  Today's article will feature fixed income strategies for those who are thinking about capital protection or cash flow during/before retirement.

What is a bond/GIC ladder?

  • A fixed income ladder is where you split your capital into equal portions and invest in fixed income instruments with variable terms/maturities (from short to long term). 
  • As each term expires, the released cash is re-invested into a longer term.
  • Bond ladders will provide monthly income (except strip bonds), whereas GIC's are compounded until the term is up. 

Why would you use a fixed income ladder?

  • This strategy allows the investor to protect their capital while staying invested in the highest fixed income product available.
  • Instead of all your capital being stuck in one term, it allows you to diversify your interest rates/exposure as the term/maturity comes due.

What are some examples? 

  • For a 5 year (or 5 rung) bond ladder, an investor with $100,000 would split the pot into 5 parts of $20,000 each.  Each part would be invested in bonds with 1,2,3,4,5 year terms.  As each term expires, the cash is re-invested into a 5 year term.  Typically speaking, the longer the term, the higher the rate.  As each term expires, the free cash will be invested at the longest term, in this case, 5 years.  The same can be done with a 10 year bond/GIC ladder.
  • The bond ladder is useful if cash flow is required during retirement (low risk Government of Canada bonds are preferred).  The GIC route may be helpful if you're looking for capital protection just prior to retirement.

What are the drawbacks?


This strategy are for those who wish to diversify their fixed income/interest rate exposure.  It is recommended that this strategy only be attempted if you have enough cash for at least 5 "rungs".

Any of you have real life experience with bond ladders? 

This is a simple primer on bond/gic ladders, so please do your own due diligence before attempting such a strategy.

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  1. FrugalTrader on September 10, 2007 at 6:54 pm

    Not a very popular topic I can see. :)

  2. nobleea on September 10, 2007 at 8:18 pm

    Ha! Bonds/GICs are not sexy, I guess.

  3. on September 10, 2007 at 8:25 pm

    Well I can tell you that I use bond ladders for a LOT of clients. I generally only put these in the registered accounts, because if you are looking for cashflow from a non-registered account, there are some alternatives i.e. buying a preferred share portfolio.

    You also have split shares whereby a dividend paying stock is split into a capital share and a preferred share. So if a stock is $100 with a dividend of $4 (or 4%), then it can be bought and split by an intermediary for a capital share worth $50 with no dividend (but if the underlying common increases from $100 to $110, your capital share increases from $50 to $60) and a preferred share of $50 with the dividend of $4 (8% yield). Since it is taxed preferentially it’s like getting a 11% bond.

  4. on September 10, 2007 at 8:31 pm

    In Canada the Bond Market is 21 times the size of the stock market – how’s that for sexy? :)

    I know some Bond traders who make a good long term rate over 10% annualized in bonds – and they do some simple (but sexy) stuff. If you are well tuned to the interest rate movements and can analyze economic data – you can probably make good money with much less volatility trading bonds.

    Convertible bonds offer some arbitrage opportunities as well if you can be bothered to monitor both the bond and the underlying common…

  5. […] How Bond/GIC Ladders Work by Frugal Trader @ Million Dollar Journey. Instead of all your capital being stuck in one term, it allows you to diversify your interest rates/exposure as the term/maturity comes due. […]

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