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A bond ladder is a portfolio of bonds that mature at regular intervals. You can create a bond ladder using the Bond Ladder tool to search Fidelity's inventory of bonds and purchase a portfolio of bonds that meet your investment strategy.
There are essentially two types of risk associated with using the Bond Ladder tool:
For detailed information about the risks of fixed income investing, visit Investment Products > Fixed Income on Fidelity.com, or consult your tax advisor.
If you decide to include callable bonds in your ladder, these bonds may be called prior to maturity. If a bond is called, your interest payments cease and the principal is returned as of the call date. If you seek to reinvest the principal in a similar bond issue, you will likely have to accept a lower yield (and lower interest payments) consistent with prevailing interest rates. The ladder attempts to mitigate reinvestment risk, as bonds are scheduled to expire at regular intervals. You can reinvest the proceeds further out in the ladder, and buy bonds during varying market and interest rate conditions. A called bond will alter your payment schedule and the scheduled intervals of principal coming due.
You can either invest an initial amount, or choose bonds and securities that generate an initial annual income:
You can choose to have your ladder invest in taxable bonds, or in tax-free municipal bonds. Tax-free municipal securities are inappropriate holdings for tax-advantaged accounts such as an IRAs and other retirement accounts. Consult your tax advisor for advice about your specific situation.
If you choose to invest in taxable bonds, the Bond Ladder tool indicates the relative risk of the different fixed income security types.
The minimum credit rating acceptable for your ladder represents your highest acceptable risk (the lower the credit rating, the higher the risk). The Bond Ladder tool searches a subset of Fidelity's inventory of bonds, ranging from your requested minimum rating to the highest rating (AAA). For example, if you indicate an A rating, the Bond Ladder tool searches bonds with ratings between A and AAA. The Bond Ladder tool searches the inventory of A rated bonds before searching the more conservatively rated AA and AAA bonds.
You determine your bond ladder's structure by selecting the following options:
The Bond Ladder tool is not intended as a tax planning tool. Since the tool does not take into account the income tax rules regarding the purchase, sale, or holding of bonds, the tool's calculation of estimated cash flows does not reflect any income tax consequences. Any tax information, such as the tax equivalent yield, is for information purposes only. Fidelity does not offer tax advice. You should contact an attorney or tax advisor regarding your specific legal or tax situation prior to taking any action based upon the information.
Specific bonds are returned in response to the criteria you entered, such as credit quality, callable/non-callable, etc. To verify that Fidelity's inventory is sufficient to complete your ladder, we take the amount of bonds you need per rung of the ladder and only include bonds if Fidelity holds more than enough bonds to meet your order (your requested amount plus 25 additional bonds).
If you search for bonds based on an initial investment amount, the Bond Ladder tool displays the bond closest to the interval calculated for your ladder.
If you search for bonds based on annual desired income, the Bond Ladder tool displays the bond with the highest coupon for that rung. Note that income is derived only by the coupon on the bond, and some high-coupon bonds may trade at a significant premium. When a bond matures, you receive the principal of the bond back at par value. For example, if you buy a bond at 105, you pay $1,050 per bond. At maturity you receive par, or $1,000 per bond. The $50 premium is not returned, but is an offset to taxable income. Contact your tax professional about tax treatment on premiums paid on bonds.
Blank rungs are created when there is no inventory available for those rungs that meet your search criteria. You may replace a blank rung with an existing position, or check back later, as inventory updates.
You can refine your bond search by sorting the results according to highest, lowest, or medium yield. For example, if you choose to sort by lowest yield for a minimum credit rating of A, the Bond Ladder lists bonds with the lowest yield within the A rating tier first.
Selecting the highest yield or lowest yield option does not necessarily return the highest or lowest yielding bond for the selected rung out of all the available alternatives, since the Bond Ladder tool first searches the central rung month to find bond(s) that meet your other selected criteria. Bonds from the central rung month appear at the top of the list of eligible bonds. If there are no bonds in the central rung month, the Bond Ladder tool looks at the two months on either side of the central rung month for the highest- or lowest-yielding available bond.
Sorting by medium yield generates the same sort order as sorting by highest yield, except that higher-yielding outliers are removed from consideration in order to moderate risk.
The Bond Ladder tool calculates the spacing between maturities (rungs) in your ladder. Central rung months are spaced equally across the life of the ladder, and are determined by dividing the number of months between the ladder's first and final maturity dates by the number of rungs you selected. The Bond Ladder tool searches central rung months first when searching for bonds that meet your selected criteria.
Bonds and securities in your ladder are traded as individual fill-or-kill market orders, subject to the same markups and commissions that would apply if the bonds were purchased separately (outside of the ladder).
Your order will not be sent to Fidelity if you leave the Verification page before you click Place Order, or if you click Void.
When you click Place Order on the Verification page, you are agreeing that the order information is correct, and you are authorizing Fidelity to execute the order on your behalf.
When you submit a ladder order online, you always see a Verification page. Review the Verification page carefully before placing your order. Once you place your order, you see a Bond Ladder Confirmation page displaying the trade details, including a confirmation number for each individual trade within the ladder. You can print this confirmation for your records.
Yes. The Bond Ladder Results page lists the bonds that the Bond Ladder tool matches to the criteria you selected, in the sort order you selected. The results list flags multiple bonds from the same issuer. You can replace an individual bond in your ladder by clicking View Alternatives next to the bond you want to replace. You can select a replacement bond from a list of securities that match the criteria you selected for the bond you want to replace. You can also replace that bond with one from your existing positions by clicking Existing Positions.
A "hole" appears in the income stream of your ladder when a bond is called or has matured, or when you sell it out of your ladder. To select a bond to fill the hole, go to the Build a Ladder page and click View Ladder next to the ladder which has the hole. Bonds that have matured, been called, or been sold appear in the ladder details with missing data. You can replace or remove these bonds from the ladder by clicking the relevant link in the far right column. If you're attempting to replace a bond from inventory, you see a list of potential replacements, ordered by "workout date" (the date that the bond will expire). To purchase the replacement bond, click Trade. You can also use an existing position to replace the bond. Click Existing Positions to find a replacement.
Any existing position is priced based on last night's price and yield. These prices are based on Matrix pricing, a method of fair valuing bonds that applies analytic methods to historical prices to produce an estimated price. This price is not necessarily the price you paid for the bond, nor is it the price you could receive if you sold it.
Bonds that are returned as part of the search result are "real-time" and come from Fidelity's inventory.
Fidelity provides a free Alert service, which notifies you a few days prior to any of your bonds' call or maturity date. This gives you the opportunity to decide if you wish to replace the bond prior to missing any future income payments. You are also notified of any maturing or called bonds on your statements, but your statements report these events only after the bond has been called or matured.
You can attempt to cancel a pending bond or security order that has not yet executed from the Orders page. See Orders for more information. Attempts to cancel open orders are performed on a best-effort basis. There is no guarantee that an open order can be canceled, either in whole or in part.