The maturity ladder refers to the strategy of buying an equal number of maturity bonds over equal periods, such as every six months or annually. This is also known as the sorting term.
The basis of reasoning
Interest rates are notoriously difficult to predict. When an investor allocates part of his portfolio to a fixed income, the question is which maturity or maturity he should choose. To eliminate conjecture, he can buy bonds or CDs that are scheduled to expire steadily and then, at maturity, make new investment decisions based on current market conditions.
When interest rates are low, it is necessary to keep short term to take advantage of future interest rate hikes. When interest rates are high, it has to go with the longest term to take high-interest rates before they fall. A ladder investor can adopt this strategy when his bonds expire one by one. If no change in interest rates occurs, he can reinvest maturity bonds into a new bond that maturity after the last bond in the ladder.
An investor builds a ladder of five bonds that expire once a year for the next five years. At the end of the first year, the first bond is maturity and the five-year bond has four more years to expire. If the interest rate does not change, the investor buys another 5-year term bond with the amount collected. Instead, if interest rates rise, he can buy 10-year bonds to take higher interest rates.