How to build a bond ladder: a step-by-step guide

A bond ladder is one of the oldest and simplest ways to organise fixed-income investments. Instead of putting all your money into one bond that matures on one date, you spread it across several bonds that mature one after another, like the rungs of a ladder. This guide explains why people build ladders, walks through an illustrative example in soʻm, and shows what to check when you try to build one with bonds traded on the Tashkent Stock Exchange (UZSE).

If you are new to bonds, start with bond yield, coupon and price, which explains the terms used below.

What a bond ladder is

A ladder has two parts:

• Rungs. Each rung is a bond, or a group of bonds, with a different maturity date. For example, one rung matures in one year, the next in two years, and so on.
• Spacing. The gaps between maturities are usually even, such as one year or six months, so money comes back to you at regular intervals.

When the shortest rung matures, you receive its face value back. You then decide what to do with that money: spend it on a planned goal, or reinvest it in a new bond at the long end of the ladder. If you keep reinvesting, the ladder rolls forward and always keeps the same shape.

Why investors build ladders

A ladder does not promise a higher return than other approaches. What it offers is structure.

Regular access to money. Because something matures every year (or every six months, depending on the spacing), part of your money comes back on a predictable schedule without selling anything on the market. That matters on a market where many bonds trade rarely and a quick sale may only be possible at a lower price.

Less dependence on the timing of interest rates. Nobody knows where rates will go. If you put everything into a five-year bond and rates rise next year, you are locked into the lower rate. If you put everything into a one-year bond and rates fall, you have to reinvest the whole amount at the lower rate. A ladder sits between these two extremes: each year only one part of your money is reinvested, at whatever rates prevail then. How the central bank's policy rate influences bond yields is covered in interest rates and the CBU policy rate.

Spreading credit risk. If each rung is a bond from a different issuer, one issuer's problems affect only part of the ladder. This is the same logic as diversification, applied to borrowers.

Matching future spending. You can place rungs to mature just before known expenses, such as university fees or a planned purchase.

An illustrative example

The figures below are invented to show the mechanics. They are not quotes for any real bond, and real coupons, prices and maturities will differ.

Suppose you have 10,000,000 soʻm to put into bonds and want a five-year ladder with one-year spacing. You split the money into five equal parts of 2,000,000 soʻm:

• Rung 1: matures in 1 year, 2,000,000 soʻm, illustrative coupon 14%.
• Rung 2: matures in 2 years, 2,000,000 soʻm, illustrative coupon 15%.
• Rung 3: matures in 3 years, 2,000,000 soʻm, illustrative coupon 16%.
• Rung 4: matures in 4 years, 2,000,000 soʻm, illustrative coupon 16%.
• Rung 5: matures in 5 years, 2,000,000 soʻm, illustrative coupon 17%.

Assume for simplicity that each bond is bought at face value and pays its coupon once a year. In the first year the ladder pays coupons of 280,000 + 300,000 + 320,000 + 320,000 + 340,000 = 1,560,000 soʻm before any tax, which is 15.6% of the 10,000,000 soʻm invested.

At the end of year one, rung 1 matures and returns 2,000,000 soʻm. If you want to keep the ladder going, you buy a new five-year bond with that money. The ladder now again has bonds maturing in one, two, three, four and five years. Every year you repeat this step.

Two things happen over time. First, all your money gradually moves into five-year bonds bought at different moments, which usually earn more than short bonds when the yield curve slopes upward. Second, every year one fifth of the portfolio comes due, so you are never more than a year away from getting part of your money back at face value.

This example ignores taxes, broker commissions and the fact that bonds rarely trade exactly at face value. It also assumes every issuer pays in full and on time, which is never guaranteed. For how coupon income is taxed, see dividend and coupon tax in Uzbekistan.

Building a ladder with UZSE bonds

In practice the shape of your ladder depends on what is available. A few steps help.

1. See what is listed. The exchange publishes its list of bonds and their terms on uzse.uz. On Finmind, the UZSE bonds section has a public page for each listed bond with its issuer, coupon rate, coupon frequency, face value, issue and maturity dates, and the last closing price when trades have been recorded.
2. Group bonds by maturity. Sort the candidates by maturity date and see which years you can fill. The range available at any moment may be limited, and you may not find a bond for every rung. It is fine to leave a gap or to use a bank deposit with a matching term for one rung; bank deposits vs bonds compares the two.
3. Check each issuer. A ladder of five bonds from weak issuers is not safer than one bond. Read the issuers' reports on openinfo.uz before you buy.
4. Check liquidity. If a bond has not traded for a long time, the last price may say little about what you would pay today, and you may struggle to sell before maturity.
5. Know the payment dates. Coupons and repayments arrive on the dates in each bond's terms. Finmind's market-wide payout calendar lists upcoming coupons and maturities, so you can see how the cash from your rungs will be spread across the year.
6. Write the plan down. Record each rung: the bond, amount, price paid, coupon dates and maturity date. When a rung matures, you will already know what you intend to do with the money.

Common mistakes

• Chasing the highest coupon for every rung. A very high coupon often reflects higher credit risk. The purpose of a ladder is predictability, and a default on one rung breaks it.
• Filling every rung with one issuer. Different maturities from the same borrower do not spread credit risk.
• Forgetting reinvestment. If matured money sits idle, the ladder quietly shrinks. Decide in advance whether each rung will be reinvested or spent.
• Selling rungs early. The ladder works because you hold bonds to maturity. Selling before then exposes you to the market price on that day.

This article is for education only and is not investment advice. Investing in securities involves risk, including the loss of money you invest.